Philanthropy and the Estate Tax

By :: July 19th, 2010

When President Obama proposed to cap the value of itemized deductions at 28 percent, the philanthropic sector came out foursquare against the idea, claiming that it would decimate charitable contributions. Cutting the tax savings from gifts to charities for high-income taxpayers would raise the after-tax cost of giving and lead people to give less. For taxpayers in the 35 percent top tax bracket, the cost of giving away a dollar would jump 10 percent from 65 cents to 72 cents (ignoring any state tax savings). That would lead to perhaps a 2 percent drop in giving—about $9 billion. (Len Burman explained the math in TaxVox last year.)

This year’s estate tax hiatus should have caused the same sort of fuss. Why? With no estate tax in 2010, people have less incentive to leave charitable bequests. In 2009, when estates worth more than $3.5 million faced a 45 percent tax rate, giving away a dollar cost only 55 cents after taxes because such bequests are deductible and thus reduce the taxable estate. This year, with no estate tax and thus no tax savings, that cost nearly doubled to a full dollar.

Estimates of how such a price rise would affect giving vary widely. With the 55 percent top tax rate in effect before 2001, economists estimated that eliminating the tax would cut giving by anywhere from 12 percent to 37 percent. Using the lower value, having no estate tax might cut giving by nearly $3 billion (based on $23 billion of charitable bequests in 2008, the most recent year for which data are available). That may be just a third of the reduction that the president’s proposal would cause—and it would occur only this year, not every year—but it’s still not chump change. At the same time, the estimate could vastly overstate the actual effects. The estimated responses assume permanent elimination of the tax, not just a one-year pause. For lots of reasons, people might respond a lot less.

So why do we hear no clamor to reinstate the tax today? Perhaps philanthropies are banking on the scheduled resurrection of the tax next year at pre-2001 levels—a 55 percent top tax rate on estates over $1 million, which would boost the incentive to give above what it was last year. Maybe they think uncertainty over the tax this year—Congress could restore it retroactively—will keep people from changing their planned giving. Perhaps they’re counting on inertia: people may be slow to change their wills to match tax laws and may not react at all to a temporary elimination of the tax. Or maybe, just maybe, it’s because complaining means calling for a tax increase and not a tax cut. That stance would not appeal to big givers with high incomes.

And, of course, no one ever said political arguments must be consistent.