Thursday, December 20, 2012
Edward Zelinsky (Cardozo) had an interesting blog post yesterday about the estate tax charitable deduction. Specifically, Zelinsky believes that the commitment of Warren Buffett and other high-wealth individuals to strengthening the estate tax is at odds with their commitment to philanthropy. Zelinsky argues that:
It is perfectly plausible to call for estate taxation only for those who don’t distribute their wealth to philanthropy. It is, however, hard to reconcile that position with Responsible Wealth’s advocacy of strong estate taxation. Mr. Gates, Sr., for example, declared that “it would be shameful to leave potential revenue on the table from those most able to pay.” However, that is precisely what happens when large estates go to charity, namely, estate tax revenue which would otherwise flow to the federal government is instead diverted to charity. Such charity may be worthwhile but it does nothing to reduce the federal deficit.
Zelinsky then proposes a few limits on the estate tax charitable deduction. A first alternative would be to allow decedents to deduct only 70% of what they donate to charity. A billionaire who leaves a $1,000,000,0000 estate to charity would only be allowed to deduct $700,000,000, leaving him with a taxable estate of $300,000,000.
A second alternative he proposes would allow the first $10,000,000 of charitable bequests to be fully deductible, followed by a phase-out. For example, he suggests that the next $50,000,000 worth of charitable bequests would be 90% deductible, and any remaining gifts only 70% deductible.
Because the unlimited nature of the estate tax deduction (in contrast to the various limits on the income tax deduction) has long puzzled me, I find it refreshing that Zelinsky is bringing up the estate tax charitable deduction. However, because the goal of the estate tax is to do more than simply raise revenue, I think limits on its charitable deduction can't be analyzed in terms of dollar limits and revenue alone. A better solution would be to consider the additional social goals of the estate tax and craft limits on the estate tax charitable deduction that reflect those goals.
Hat tip: Tax Prof Blog
Miranda Perry Fleischer
Wednesday, December 19, 2012
Monday's Wall Street Journal debate on the charitable deduction offered conflicting views on the extent to which tax incentives impact giving. On one hand, as Diana Aviv of the Independent Sector noted, a number of studies predict that limiting or the ending the income tax deduction will dampen charitable giving. On the other hand, as Dan Mitchell of the Cato Institue mentioned, tax benefits for giving have changed drastically over the years but giving remains relatively constant at about 2% of GDP. Unfortunately, I find it hard to form an opinion about the various proposals to limit the deduction that are floating around for two reasons.
First, we just don't know enough about the interaction of various motives for giving and which motives will "win" if the tax benefits for giving are decreased. Let's start with what we do know. It is well-established that donors of different income groups support different types of charities. Upper-income folks tend to focus on higher eduction, health organizations, and the arts. Albeit to a lesser extent, however, they also support social service organizations and religious groups (which often offer social services). Most studies also predict that limits on the deduction will impact giving by the well-off more than the less well-off. Lastly, a study from this summer suggests that giving to certain groups ("arts and culture, private education, environmental protection, animals welfare, human services, philanthropy, and private foundations") is more elastic than giving to other groups (hat tip Grace Lee). What I would like to see, however, is someone put this all together to see if we can learn anything about the elasticity of high income donors to various organizations. If giving by a given income group falls, what does that really mean? Who does that really impact? Will they cut their giving equally across the board, perhaps continuing to support the same groups as before but cutting the dollar amount each group receives by a set percentage? Or will they react differently to different donees? For example, will well-off donors keep giving to the opera because of the social status but cut donations to the Salvation Army? Or will altruism win out, and they keep donating to the Salvation Army but decrease gifts to the opera? A better sense of which charities would be impacted -- were giving to indeed drop -- would help me assess these proposals. The IU Center on Philanthropy's studies of high-net worth individuals and their motivations is a good start, but we need more specific data about how such individuals might react.
Second, most of the discussions I've seen focus on the basic aspects of the income tax charitable deduction in isolation. But as we know, a host of other tax changes are also being discussed. How might these other changes influence giving, if at all? For example, if the capital gains rate goes up, will that encourage more gifts of appreciated property? Some Florida charities think so. If so, will that counteract any potential drop from some of the proposed changes to the basic structure of the deduction? The estate tax is also in the mix, too. Although it's currently scheduled to revert to a $1 million exemption and a top rate of 55% (from its current $5 million exemption and top rate of 35%), most don't think that will happen. Lately, however, there's been a renewed push by some not to simply extend the status quo but to strike a middle ground, perhaps with a $3.5 million or even $2 million exemption level. Would a tougher estate tax, relative to today, mitigate changes to the income tax charitable deduction by encouraging donors to shift their gifts to their death?
If these studies exist and I can't find them, please correct me. And if they don't exist yet, I suppose this is a plea to the economists for help!
Miranda Perry Fleischer
Tuesday, December 18, 2012
Also in Monday's Wall Street Journal was an article on giving to colleges, more specifically, four rules to increase a gift's impact. Although the article's fourth tip concerned the various tax advantages of different forms of giving (such as donating appreciated stock or leaving a bequest), it was refreshing that tax planning was not the article's main focus. Instead, the first three tips offered more practical advice about having an impact on the college itself. The first tip, for example, concerned donor restrictions on gifts. The article noted that while colleges prefer unrestricted gifts, many donors want the extra gratification that comes from funding a project they especially care about. To strike this balance, the article emphasized the need for donors who desire restrictions to make sure any restrictions are flexible enough so that the gift doesn't sit unused -- a point I imagine many donors don't consider early enough. The second tip encouraged donors to consider giving property that could actually be used by the school, such as scientific equipment or musical instruments. These were nice examples, as I imagine many donors just think in terms of cash and stock. What I especially liked, however, was the article's third tip -- encouraging gifts to schools other than one's alma mater. While it's natural to want to give back to one's alma mater, one's charitable dollars can often have a greater impact elsewhere, especially if one went to an already well-endowed school.
Miranda Perry Fleischer
Monday, December 17, 2012
Today's Wall Street Journal features an interesting debate on ending the income tax charitable deduction between Dan Mitchell of the Cato Institute (end it) and Diana Aviv of the Independent Sector (keep it). Although the arguments won't surprise readers already familiar with the scholarly literature on the subject, the two pieces do a fairly nice job laying out the arguments for a lay audience. That said, each commenter makes a couple points that I'd like to see fleshed out a bit.
Aviv leads her defense of the deduction by noting that "limiting it -- or worse curtailing it -- would rob funds from nonprofits at a time when charities are already struggling to meet increased demand for programs and services." She argues that the tax deduction does indeed incentivize giving that would not otherwise take place, pointing to the high percentage of gifts made at the end of December and to the large number of itemizers who take a charitable deduction. (To me, however, these statistics beg the question whether these individuals are being incentivized by the deduction or simply taking advantage of a tax benefit for making gifts they would make without the deduction). In her defense, she doesn't rely on these numbers alone; she also cites the 2010 IUPUI study where high net-worth individuals themselves said they would cut back on giving if the tax incentive were decreased.
Aviv also criticizes Obama's proposal to limit the value of the deduction to 28%, correctly noting that some experts predict a decline in giving from that proposal. She further notes -- correctly, in my mind -- that we should judge the impact of limiting the charitable deduction by the impact on charities more than on the donor. What she doesn't do, however, is try to distinguish which charities will be hurt the most. In my view, for example, a large impact on a soup kitchen should be judged differently than a large impact on the ballet. Lastly, Aviv argues that the charitable deduction is worthwhile because it encourages other-serving behavior instead of self-consumption (in contrast to, for example, the mortgage interest deduction). Again, this is partly true -- a donation to a soup kitchen is other-serving -- and partly not true -- a donation to have a building named after you on your alma mater's campus or a donation to your child's private school are both pretty self-serving.
Mitchell's main argument is that the best way to help charities is to have a strong economy. He notes, for example, that the tax rewards for charitable giving have fluctuated drastically over the years but that giving stays relatively constant at about 2% of GDP. Mitchell also criticizes the deduction for mainly benefiting those with incomes over $100,000. (To me, this alone isn't doesn't help evaluate the fairness of the deduction. If poor people are kept from going hungry or homeless because of the deduction, then the fact the well-off get a tax break may be worth it. But if the well-off get a tax break and it has no affect on the plight of the poor, that's a different story).
Mitchell then focuses on the other incentives for charitable giving, arguing that cultural pressure, perks like naming opportunities, and altruism would motivate the same level of giving. He also takes issue with the surveys where donors state that their giving will drop, noting that year in, year out, giving stays about the same. I tend to agree with these arguments, but then I part ways somewhat with Mitchell toward the end of his piece. He argues that because a dollar gift only costs the donor 65 cents, donors become lazy and don't monitor charities to make sure their funds are used wisely. While the extent to which donors pay attention to how their dollars are spent varies among donors, I haven't seen any evidence that non-itemizers are more careful with their giving dollars than itemizers in this respect, or that those in lower brackets are more careful than those in higher brackets. He also criticizes charities for being inefficient and for having overly high marketing expenses. While some charities certainly are inefficient, that seems to be more a product of the non-distribution constraint than the charitable deduction, and I doubt that charities that spend too much on marketing now would spend less if giving became more expensive.
More thoughts on this particular debate tomorrow.
Miranda Perry Fleischer