With Congress considering trillions of dollars in new tax obligations, the implications of some of these proposed measures on charitable pursuits are unclear. But one proposal in particular, a wealth tax, could pose a serious threat to private philanthropy.
As wealth tax proposals have gained traction and legislative sponsors in Congress, proponents are grappling with the sheer scope of technical and administrative difficulties a wealth tax entails. Just one of these myriad challenges is the question of how a wealth tax should treat assets held by charitable foundations.
In truth, this issue highlights the difficulty of administering a wealth tax and preventing avoidance. A major concern of proponents is the possibility taxpayers will “hide” wealth, and many allege that Americans of means cynically use private charitable foundations to protect their assets from taxation. Emmanuel Saez and Gabriel Zucman, prominent European economists who advised Sens. Elizabeth Warren and Bernie Sanders on their wealth tax proposals, have suggested as much in their writings.
Their solution to this perceived problem is to assess tax bills based not just on personal assets held by wealthy Americans, but on their charitable foundations’ assets as well. Given that American charitable foundations contributed nearly $89 billion last year to nonprofit organizations, any reduction in assets available for giving would have a substantial impact on the communities currently benefiting from foundations’ altruism.
In addition to the likely complexity of implementing necessary anti-avoidance measures, such a tax would substantially curtail charitable giving. Earlier this year, the National Taxpayers Union Foundation (NTUF) calculated the impact of Warren’s proposed 2-3% wealth tax on charitable foundation assets. They found it would eat up between 6% and 25% of the annual disbursements of five selected foundations including the Dell Foundation, the Omidyar Network and Dalio Philanthropies, among others.
If these foundations have to pay large tax bills, one could expect their capacity to give would be reduced nearly proportionally to the size of their tax bills. Generally, foundations manage their assets in such a manner as to be able to continue their philanthropic activities for years to come — and any new tax payments would necessarily reduce the amount of philanthropic activity they could responsibly fund.
In fact, even if assets held by charitable foundations were exempted entirely, any wealth tax, especially one as significant as what Sanders and Warren propose, would likely reduce giving to charitable foundations, and in turn reduce charitable foundations’ activity.
NTUF’s analysis of Warren’s wealth tax found the tax liability of foundations’ donors would represent a significant percentage of their annual giving. For example, the $1.4 billion that Michael and Susan Dell (of computer maker Dell Technologies) would owe under Warren’s wealth tax would represent more than 1,006% of their $136.9 million contribution to the Dell Foundation last year. The $658 million wealth tax bill for eBay founder Pierre Omidyar, meanwhile, would represent 1,719% of his contribution last year to the Omidyar Network.
Wealth tax advocates may suggest this is good news, a forcing mechanism of sorts to turn private wealth to the public benefit. But even large tax bills for the wealthiest Americans are a drop in the bucket of federal spending. For example, the $658 million wealth tax bill Pierre Omidyar would face would fund the government for less than an hour. The federal government would chew through the entire $88.55 billion charitable foundations spent in 2020 in less than five days.
The truth is private foundations can often do more good than federal programs. Charitable foundation activity not only supplements government efforts, it also fills in gaps, helping people and communities missed by the vast bureaucracy at the head of often broken and mismanaged welfare programs.
Whichever way proponents propose to address the administrative and technical challenges inherent in a wealth tax, it is unavoidable that such a tax would pull resources from charitable foundations. That’s just one more reason to be wary of wealth taxation.
Andrew Wilford is a policy analyst at the National Taxpayers Union Foundation.