Published in The Tennessean, Sunday, January 9, 2011
Charities should reconsider their support for the estate tax
by Richard J. Grant
After the recent tax debate, Congress chose to keep most of the major tax rates where they were in 2010. One rate that will be higher is the estate tax. But a more interesting fact is the source of some support for the estate tax.
It is understandable that a benefactor and possible heirs would oppose the existence of an estate tax. It reduces their choices. Any after-tax uses to which they could put their wealth would also likely be available in the absence of the tax. A non-taxed estate could be bequeathed to any heir, which could include any relative, friend, organization, charity, or even a government treasury.
It doesn't work the other way around. The estate tax takes from the estate a portion of any wealth that is not allocated to governmentally approved uses. Contributions to any organization that the government deems to be a “charity” would be deductible from the taxable wealth of the estate. Deductibility gives charitable organizations a relative advantage in the competition for inheritable wealth.
As Paul wrote in his second letter to the Corinthians (9:7), “Each of you should give what you have decided in your heart to give, not reluctantly or under compulsion, for God loves a cheerful giver.” But that seems not to be good enough for many lobbyists for charitable organizations. In their eagerness to do good they forget that their complicity in the unequal imposition of the tax code is a resort to compulsion. They might believe that they are increasing charitable giving, but they are not increasing charity.
The irony is that they might not be increasing charitable giving either. The act of giving implies that there is something to give. But to the extent that taxation diverts and hinders wealth creation, there is a risk that the tax advantages enjoyed by charitable organizations will be offset by the wealth-reducing effects of the tax itself.
Government officials already know that the inheritance tax is a poor source of revenue. The higher the inheritance-tax burden, the more likely it is that wealthy individuals will find ways to avoid paying the tax. Tax avoidance is, of course, never costless. Much wealth is dissipated in the attempt to maximize after-tax wealth and satisfaction. The high-tax reality diverts many people into careers as lawyers, accountants, and financial planners rather than the possibly more-productive careers that they might have enjoyed in a low-tax world.
Economists refer to the tax-deductibility of charitable contributions as “reducing the cost of giving.” Statistical studies that focus on this aspect suggest that higher tax rates encourage charitable giving. But they seem to have missed what economists call the “wealth effect.” Benefactors who wish to allocate their estates between heirs and charitable donations are better able to give to both when their after-tax wealth is higher. But higher tax rates reduce after-tax wealth.
Professors William Beranek, David R. Kamerschen, and Richard H. Timberlake of the University of Georgia have found that this not only makes good theoretical sense but also shows up very clearly in the statistics. Their study on “Charitable Donations and the Estate Tax,” which was recently published in the American Journal of Economics and Sociology, shows that it is far more likely that a reduction in the inheritance-tax rate will be associated with increases in charitable giving.
We need not force people to give.
Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: firstname.lastname@example.org
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