tag:theconversation.com,2011:/fr/topics/estate-tax-43999/articlesEstate Tax – The Conversation2021-12-09T19:11:03Ztag:theconversation.com,2011:article/1734092021-12-09T19:11:03Z2021-12-09T19:11:03ZVital Signs: the case against death duties just got stronger<figure><img src="https://images.theconversation.com/files/436535/original/file-20211209-133881-vfk7rk.png?ixlib=rb-1.1.0&rect=1436%2C129%2C3874%2C2332&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">shutterstock</span></span></figcaption></figure><p>If you are worried about inequality you probably lament the end of <a href="http://classic.austlii.edu.au/au/journals/UWALawRw/1982/6.pdf">death duties</a>.</p>
<p>At first in Queensland and then in the rest of the country, Australia became one of the <a href="https://researchbank.swinburne.edu.au/file/fa8c1de1-a895-4b6c-b843-3874a82694e1/1/PDF%20%28Published%20version%29.pdf">first nations in the world</a> to abolish death duties in the late 1970s.</p>
<p>Surely an inheritance tax (that’s what a death duty is) would cut the size of inheritances, reducing the intergenerational transmission of inequality.</p>
<p>Actually no, according to a groundbreaking study released on Tuesday by the <a href="https://www.pc.gov.au/research/completed/wealth-transfers">Productivity Commission</a>.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/436519/original/file-20211209-136652-1i1gu8a.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/436519/original/file-20211209-136652-1i1gu8a.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/436519/original/file-20211209-136652-1i1gu8a.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=968&fit=crop&dpr=1 600w, https://images.theconversation.com/files/436519/original/file-20211209-136652-1i1gu8a.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=968&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/436519/original/file-20211209-136652-1i1gu8a.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=968&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/436519/original/file-20211209-136652-1i1gu8a.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1216&fit=crop&dpr=1 754w, https://images.theconversation.com/files/436519/original/file-20211209-136652-1i1gu8a.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1216&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/436519/original/file-20211209-136652-1i1gu8a.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1216&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.pc.gov.au/research/completed/wealth-transfers">Productivity Commission</a></span>
</figcaption>
</figure>
<p>The commission used datasets including tax returns and probate records to look at how much money is passed on in inheritances and gifts and where it goes.</p>
<p>The striking finding is that an awful lot is passed on. </p>
<p>In 2018 it was an astonishing A$120 billion, way in excess of the $80 billion the Australian government spent on health, and approaching the $170 billion it spent on social security and welfare.</p>
<p>An even more astounding finding is that these transfers actually reduced inequality.</p>
<p>I’ll say that again: “reduced inequality”.</p>
<p>One of the authors of the report, Commissioner <a href="https://www.pc.gov.au/about/people-structure/commissioners/catherine-de-fontenay">Catherine de Fontenay</a>, summarised the finding this way:</p>
<blockquote>
<p>When measured against the amount of wealth they already own, those with less wealth get a much bigger boost from inheritances, on average about 50 times larger for the poorest 20% than the wealthiest 20%</p>
</blockquote>
<p>It isn’t that the biggest inheritances don’t go to the already-wealthiest fifth of the population. Of course they do. This graph shows how big, in thousands of dollars.</p>
<hr>
<p><strong>Average wealth transfer by wealth quintile (in dollars)</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/436640/original/file-20211209-13-10esu8p.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/436640/original/file-20211209-13-10esu8p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/436640/original/file-20211209-13-10esu8p.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=259&fit=crop&dpr=1 600w, https://images.theconversation.com/files/436640/original/file-20211209-13-10esu8p.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=259&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/436640/original/file-20211209-13-10esu8p.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=259&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/436640/original/file-20211209-13-10esu8p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=326&fit=crop&dpr=1 754w, https://images.theconversation.com/files/436640/original/file-20211209-13-10esu8p.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=326&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/436640/original/file-20211209-13-10esu8p.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=326&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Average equivalised wealth transfer received among all people in a three-year period, by initial equivalised wealth quintile.</span>
<span class="attribution"><a class="source" href="https://www.pc.gov.au/research/completed/wealth-transfers">Productivity Commission</a></span>
</figcaption>
</figure>
<hr>
<p>The extra thing the commission discovered was that as a proportion of the wealth they already have, inheritances lift the wealth of the bottom fifth of the population far, far more than that of people better off.</p>
<p>And this isn’t a peculiarly Australian phenomenon. The commission finds it is true in most advanced economies.</p>
<hr>
<p><strong>Average wealth transfer as share of initial wealth</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/436637/original/file-20211209-141979-ek8kjx.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/436637/original/file-20211209-141979-ek8kjx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/436637/original/file-20211209-141979-ek8kjx.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=277&fit=crop&dpr=1 600w, https://images.theconversation.com/files/436637/original/file-20211209-141979-ek8kjx.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=277&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/436637/original/file-20211209-141979-ek8kjx.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=277&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/436637/original/file-20211209-141979-ek8kjx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=348&fit=crop&dpr=1 754w, https://images.theconversation.com/files/436637/original/file-20211209-141979-ek8kjx.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=348&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/436637/original/file-20211209-141979-ek8kjx.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=348&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Average equivalised wealth transfer in a three-year period as a share of average initial equivalised wealth by initial wealth quintile.</span>
<span class="attribution"><a class="source" href="https://www.pc.gov.au/research/completed/wealth-transfers">Productivity Commission</a></span>
</figcaption>
</figure>
<hr>
<p>So ought we to make sure inheritance taxes stay dead?</p>
<p>In our forthcoming book “<a href="https://richardholden.org/books">From Free to Fair Markets: Liberalism after COVID</a>”,
Rosalind Dixon and I argue that’s exactly what we should do.</p>
<p>In 2010 the late Emmanuel Farhi and Ivan Werning examined optimal taxation in a setting where society cared about current and future generations.</p>
<p>They found that in such a situation, the best death duty would be <a href="https://dspace.mit.edu/bitstream/handle/1721.1/58803/Farhi-2010-PROGRESSIVE%20ESTATE%20TAXATION.pdf;sequence=2">negative</a> – that we should subsidise inheritances to stop parents consuming too much and children getting too little.</p>
<h2>What about a progressive inheritance tax?</h2>
<p>One way to get the benefits of inheritances and still fight inequality would be to exempt from tax modest-size bequests and tax larger bequests even more. </p>
<p>This could be done by making inheritances of up to, say, $100,000 tax-free, and everything over that taxed (increasingly) heavily.</p>
<p>But there would be a big incentive to come in just under the cap. </p>
<p>Just as retirees <a href="https://www.smh.com.au/lifestyle/life-and-relationships/fleeing-to-the-country-a-cautionary-tale-20210715-p58a2t.html">moved to Queensland</a> to avoid death duties (and appeared to adjust the <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=907250">timing</a> of their deaths) retirees with a lot of wealth would find it worthwhile to give big gifts to their children ahead of their deaths – which would have to be caught by a gift duty.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/rethink-inheritances-these-days-they-go-to-the-already-middle-aged-122029">Rethink inheritances. These days they go to the already middle-aged</a>
</strong>
</em>
</p>
<hr>
<p>The gift duty might have to take in deposits for houses and childcare and school fees (and to be equitable, perhaps childcare in kind provided by grandparents!).</p>
<p>And then you would get into really murky territory. People would want to exempt things such as homes, which could lead to even more upward pressure on home prices if more and more wealth got transferred in the form of homes.</p>
<h2>It isn’t going to happen</h2>
<p>In any event, in Australia, it isn’t going to happen.</p>
<p>Death duties are common around the world. Across the <a href="https://www.oecd.org/tax/tax-policy/inheritance-taxation-in-oecd-countries-e2879a7d-en.htm">OECD</a>, 24 countries have inheritance or estate taxes, among them the US, the UK, Korea and Germany.</p>
<p>Canada, New Zealand and Australia are among the smaller number of countries that had such taxes and then withdrew them.</p>
<p>The mere (incorrect) assertion that Labor would bring them back helped cost it the 2019 election.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/436307/original/file-20211208-25-30ekn6.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/436307/original/file-20211208-25-30ekn6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/436307/original/file-20211208-25-30ekn6.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=329&fit=crop&dpr=1 600w, https://images.theconversation.com/files/436307/original/file-20211208-25-30ekn6.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=329&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/436307/original/file-20211208-25-30ekn6.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=329&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/436307/original/file-20211208-25-30ekn6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=413&fit=crop&dpr=1 754w, https://images.theconversation.com/files/436307/original/file-20211208-25-30ekn6.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=413&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/436307/original/file-20211208-25-30ekn6.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=413&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A mobile billboard parked at locations around Canberra during the 2019 election.</span>
<span class="attribution"><span class="source">Sally Whyte</span></span>
</figcaption>
</figure>
<p>Labor no longer has the stomach for a <a href="https://thenewdaily.com.au/news/2021/11/07/labor-rules-out-carbon-tax/">tax on emissions</a> that would actually work. </p>
<p>It most certainly doesn’t have the stomach for one that would make it harder for parents to pass on things to their children, probably worsen inequality, and complicate the tax system even further.</p>
<p><iframe id="a95Cs" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/a95Cs/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p><img src="https://counter.theconversation.com/content/173409/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is President of the Academy of the Social Sciences in Australia.</span></em></p>The Productivity Commission’s startling finding is that passing on wealth actually cuts inequality.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1382412020-05-26T12:16:57Z2020-05-26T12:16:57ZWant to do more for your favorite charity? Consider a planned gift<figure><img src="https://images.theconversation.com/files/336568/original/file-20200520-152288-2a7qg5.jpg?ixlib=rb-1.1.0&rect=830%2C75%2C2317%2C1486&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Joan Kroc gave much to charity during her life and in her will after inheriting the McDonald's fortune.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Watchf-AP-A-PA-USA-APHS469527-Kroc-Names-New-Padres-President/5e6f377c8a234cbab8c595019fdf9132/99/0">AP Photo/Bill Cramer</a></span></figcaption></figure><p>The coronavirus pandemic has led many Americans to <a href="https://www.theguardian.com/science/blog/2017/jul/25/we-fear-death-but-what-if-dying-isnt-as-bad-as-we-think">consider their own mortality</a> and <a href="https://abcnews.go.com/Health/coronavirus-leads-surge-wills-thinking-mortality/story?id=69874540">plan for the future</a>.</p>
<p>One sign of this trend: the number of people using <a href="https://www.cnbc.com/2020/03/25/coronavirus-pandemic-triggers-rush-by-americans-to-make-online-wills.html">will-writing websites</a> surged by as much as 200% in late March, when the vast majority of states ordered social distancing measures.</p>
<p>As a <a href="https://scholar.google.com/citations?hl=en&user=tu70lmIAAAAJ">scholar of philanthropy who used to raise money for nonprofits</a>, I see an opportunity even at this difficult moment. Few Americans consider leaving money to charity when they declare who should inherit their assets after they die. </p>
<p>At the same time, many nonprofits face a <a href="https://www.bostonglobe.com/2020/05/12/business/galas-postponed-or-going-virtual-nonprofits-see-big-drop-fund-raising-while-demand-services-rise/">dire situation</a> as a result of the pandemic. Demand for their services is growing while in many instances their revenue is plummeting. In the case of <a href="https://www.bostonglobe.com/2020/05/12/business/galas-postponed-or-going-virtual-nonprofits-see-big-drop-fund-raising-while-demand-services-rise/">shuttered museums, symphonies and theaters</a>, they are also missing out on money from ticket sales that they need to survive.</p>
<h2>Few wills</h2>
<p>Only <a href="https://theconversation.com/68-of-americans-do-not-have-a-will-137686">32% of Americans have a will</a>, according to recent estimates, down from <a href="https://www.caring.com/caregivers/estate-planning/wills-survey">42% a few years ago</a>. </p>
<p>But the share of the population planning to leave money to charity is far smaller: only an estimated <a href="https://www.slideshare.net/rnja8c/charitable-bequest-demographics-33283226">5% of Americans</a>. This is a tiny sliver of the people who support nonprofits in a given year. According to a recent Gallup poll, some <a href="https://news.gallup.com/poll/310880/percentage-americans-donating-charity-new-low.aspx">73% of Americans</a> made a charitable donation to a religious institution or another charity last year.</p>
<p>The most common way to make what is technically called a “<a href="https://www.forbes.com/sites/russalanprince/2016/07/05/what-is-planned-giving/#7018945548a9">planned gift</a>” is <a href="https://www.fidelitycharitable.org/guidance/philanthropy/what-are-bequests.html">a bequest</a> – a donation to a nonprofit noted in someone’s will. While the intention is expressed during the person’s lifetime, charities get the money or other assets after they’ve died.</p>
<p>Even though the numbers participating are small, bequest giving has quadrupled to nearly $40 billion annually over the past 40 years, according to the annual <a href="https://givingusa.org/giving-usa-2019-americans-gave-427-71-billion-to-charity-in-2018-amid-complex-year-for-charitable-giving/">Giving USA report</a>.</p>
<p><iframe id="0A8z4" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/0A8z4/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>That’s almost 10% of <a href="https://theconversation.com/american-giving-lost-some-ground-in-2018-amid-tax-changes-and-stock-market-losses-118892">all the money going to charity</a> each year. But I see plenty of room for growth.</p>
<p><iframe id="sn2iQ" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/sn2iQ/4/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Many ways to give</h2>
<p>Sometimes these donations <a href="https://www.nytimes.com/2018/05/06/nyregion/secretary-fortune-donates.html">are unexpected</a>. But many donors prefer to <a href="https://www.latimes.com/entertainment/arts/culture/la-et-cm-jerry-perenchio-lacma-michael-govan-news-conference-20141106-story.html">personally notify</a> the nonprofits they’ve selected. </p>
<p>It’s hard to get precise data on these gifts, because the IRS doesn’t collect it except from the estates of the wealthiest Americans.</p>
<p>There are other ways to leave money to charity after death besides bequest clauses in wills. All or part of an <a href="https://financial-dictionary.thefreedictionary.com/IRA">Individual Retirement Account</a>, or IRA, as well as 401(k)s and other employer-sponsored retirement plans can be left to charity. The same goes for <a href="https://www.forbes.com/sites/russalanprince/2016/07/05/what-is-planned-giving/#6b8c4a2648a9">many other kinds of assets</a>, including life insurance policies, trusts, real estate and tangible personal property, like artwork.</p>
<h2>A charitable opportunity</h2>
<p>My research shows that writing a will, especially when it calls for leaving money to a charity, actually <a href="https://givingusa.org/just-released-special-report-leaving-a-legacy-a-new-look-at-planned-giving-donors/">puts peoples’ minds at ease</a>. It’s a way people make meaning of their lives.</p>
<p>“I’ve been able to express my appreciation for the organization and my commitment to the cause beyond my time here,” is how one donor I’ll call Diane put it during our interview about her motivations for making a planned gift. </p>
<p>In a <a href="https://givingusa.org/just-released-special-report-leaving-a-legacy-a-new-look-at-planned-giving-donors/">national study of planned gift donors</a> last year, my research team and I found that the average age for writing a first will is 44 years old and that over half of the donors surveyed for the study established their first planned gift at the same time as their first will.</p>
<p>For those who make gifts, it’s not a difficult process. A total of 68% of the 862 donors we surveyed said making their planned gift was “very” or “somewhat easy.”</p>
<h2>Not just for the 1%</h2>
<p>Many people think that writing a will is only for the very rich, but really <a href="https://www.marketwatch.com/story/why-wills-arent-just-for-the-wealthy-2015-03-17">anyone with a family, home, or bank account should have one</a>. You don’t have to be very rich to make bequests. Some <a href="https://ssir.org/articles/entry/philanthropys_missing_trillions">middle class donors</a> write charitable gifts into their wills that exceed $100,000. </p>
<p>For many donors, planned giving enables them to make a larger gift after death than their finances would allow them to do during their life.</p>
<p>Based on my team’s research, we know that donors who make planned gifts are often long-time supporters, have worked or volunteered for the organization they’re supporting and believe in its mission. And because nearly 92% of the people we surveyed consulted an attorney when they wrote their will, it’s important that lawyers and financial planners at least raise the topic.</p>
<p>For nonprofits, estate gifts often come from those with long histories with the organization. On average, donors we surveyed had been supporting the organization that would receive their largest planned gift for 20 years.</p>
<p>The coronavirus pandemic and resulting financial crisis mean that <a href="https://www.marketwatch.com/story/why-coronavirus-could-devastate-charities-even-more-than-the-great-recession-did-2020-04-07">many people will have more trouble than usual giving to charity</a>. I believe that when anyone drafts or revises their wills, it’s important that they discuss how to support causes they care about after their death with their lawyers and loved ones.</p>
<p>[<em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>.]</p><img src="https://counter.theconversation.com/content/138241/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Elizabeth J. Dale has received funding from The Giving USA Foundation for her planned giving research as well as the Bill & Melinda Gates Foundation via Indiana University and the Ford Foundation for other research on philanthropy. The views expressed in this essay are strictly my own and do not reflect policy stances of Seattle University or The Giving USA Foundation.</span></em></p>Far fewer Americans include plans for bequests to nonprofits in their wills than give to charity on a regular basis. The pandemic could be a good reason to change that.Elizabeth J. Dale, Assistant Professor of Nonprofit Leadership, Seattle UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/948792018-04-13T15:14:47Z2018-04-13T15:14:47ZHow the new estate tax rules could reduce charitable giving by billions<figure><img src="https://images.theconversation.com/files/214364/original/file-20180411-540-1jkhcdm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">What people decide to bequeath to charity depends on many factors, including tax laws.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/photo-elderly-woman-who-writing-letter-262437872?src=x_wVwiVgi5au3O7ZTWrh2Q-1-43">Ocskay Bence/Shutterstock.com</a></span></figcaption></figure><p>Congress and the Trump administration scaled back <a href="https://theconversation.com/how-closing-the-door-on-the-estate-tax-could-reduce-american-giving-85166">the estate tax</a> when they enacted the new tax law.</p>
<p>Although the government didn’t do away with this tax altogether, as many conservatives had long called for, trimming the tax incentives the wealthy have to give could mean that some nonprofits will soon see their budgets pinched by a decline in charitable giving.</p>
<p>As an economist and a scholar of philanthropy, I anticipate that bequests from estates could decline by about US$7 billion a year. </p>
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<h2>The first $11 million</h2>
<p>The estate tax encourages giving with a dollar-for-dollar deduction from estate and gift tax liabilities matching any amount of money bequeathed to charities after death. In other words, wealthy estates save $1 in taxes for every $1 they give to charity.</p>
<p>Once a significant moneymaker that generated 10 percent of federal tax revenue, the estate tax was responsible for only <a href="https://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-about-the-federal-estate-tax">about 1 percent</a> of those funds prior to 2018.</p>
<p>Now, the first approximately $11 million in wealth one person leaves to their heirs will be entirely tax-free. That level doubles for couples. This new cutoff, which is <a href="https://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-about-the-federal-estate-tax">twice as high as the old one</a>, will rise over time as the government automatically adjusts these exemption levels for inflation. The rate to be paid after meeting the cutoff, however, remains unchanged at <a href="https://taxfoundation.org/state-estate-tax-inheritance-tax-2018/">40 percent</a>.</p>
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<p>In practice, here’s how that works. If a couple passes on an estate valued at $25 million and they leave $3 million or more to charitable causes in their will, under the new rules their heirs would owe no tax at all on this inheritance. That is because the value of the estate would be under the $22 million threshold. </p>
<p>Most people don’t leave anywhere near that much money behind, so the number of families this tax actually applies to is tiny. Only 1 in 500 estates in a given year owed any federal inheritance taxes, before the government doubled exemption levels as part of the new tax law. That share will get even smaller now.</p>
<p>And rich families use loopholes to <a href="https://www.bloomberg.com/view/articles/2014-01-30/only-idiots-pay-the-45-estate-tax">reduce the tax’s impact</a> or get out of paying it at all.</p>
<h2>Bequest incentives</h2>
<p>When the government weakens the estate tax, there are two likely scenarios in terms of giving. The people inheriting a larger share of great fortunes might leave more of their windfalls to charity. Alternatively, they could keep more of the money to invest, enjoy or share with their families and friends.</p>
<p>When the price of anything rises – whether it be bacon or tennis balls – economists expect demand for that product or service to fall. Without an estate tax, there’s nothing to be gained, accounting-wise, from rich people writing posthumous charitable gifts into their wills.</p>
<p>The question is, do fewer multimillionaires write charities into their wills when this incentive goes away or becomes smaller?</p>
<p>The money at stake is significant. Bequest giving has more than tripled in inflation-adjusted dollars over the last 40 years, rising to more than $30 billion in 2016 from less than $10 billion in 1976, according to the <a href="https://givingusa.org/">Giving USA report</a>, which the Indiana University Lilly Family School of Philanthropy researches and writes in partnership with the Giving USA Foundation.</p>
<p>To be clear, the volume of bequests is often unpredictable over the short term and does not purely track tax policy changes. Frequent adjustments to the estate tax rate and exemption level, as well as market swings – which alter the value of assets like stocks, bonds and fine art – affect what happens in a given year. </p>
<p>So do some deaths.</p>
<p><a href="https://www.npr.org/sections/thetwo-way/2017/03/20/520841767/david-rockefeller-philanthropist-banker-and-collector-dies-at-101">David Rockefeller</a>, the successful banker and heir to a great fortune, had a net worth in excess of $3 billion despite giving $2 billion away during his lifetime when he died in 2017 at 101.</p>
<p>As his estate auctions off European ceramics, Chinese porcelain, paintings, furniture and other items from his assorted collections, <a href="https://www.marketwatch.com/story/will-the-rockefeller-art-auction-of-picacco-matisse-hopper-and-okeeffe-be-the-first-to-top-1-billion-2018-04-11">hundreds of millions of dollars are going to charity</a>, bumping up the total for bequests. </p>
<p>But I have found in my own research that, controlling for various factors, a 10 percent increase in the estate tax rate is associated with a nearly 7 percent <a href="http://hdl.handle.net/1805/14225">increase in charitable bequest giving</a>.</p>
<p>Conversely, requiring estates to be larger before they are subject to the tax is associated with decreases in bequest giving. That is especially true when the exemption level is at or above $3 million, well below the new cutoff.</p>
<p>What I saw indicates that when more wealthy people were exempted from the estate tax altogether, fewer of them wrote charities into their wills. Alternatively, those who did leave money for a cause tended to make smaller donations.</p>
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<h2>Encouraging donors</h2>
<p>It’s important to remember that people give for many different reasons and that bequests are different from other kinds of donations because they are truly a last chance to support a charity or cause. As such, people usually don’t give just because of a tax deduction.</p>
<p>Doubling the exemption level will make the estate tax irrelevant for nearly all Americans – making it only apply to about <a href="https://www.forbes.com/sites/ashleaebeling/2017/12/21/final-tax-bill-includes-huge-estate-tax-win-for-the-rich-the-22-4-million-exemption/">1,800 estates per year</a>, according to one estimate.</p>
<p>What’s more, research also suggests that estate taxes can encourage donors to give more during their lifetimes. That’s because when rich people know that more of their money will be spent on taxes after they die, they are likely to give more of it away to charities they choose before that day comes. <a href="https://www.researchgate.net/publication/222174663_Bequest_taxes_and_capital_gains_realizations">Several researchers</a> <a href="http://lawdigitalcommons.bc.edu/cgi/viewcontent.cgi?article=3511&context=bclr">have estimated</a> that eliminating the estate tax would usher in a decline of non-bequest giving in the 6 percent to 12 percent range <a href="http://www.taxpolicycenter.org/publications/effects-estate-tax-reform-charitable-giving">or more</a>.</p>
<p>In other words, curbing the estate tax’s scope will probably reduce giving to charity both during donors’ lifetimes and after their deaths too.</p>
<p><em>Editor’s note: This article includes information from articles The Conversation published on <a href="https://theconversation.com/how-closing-the-door-on-the-estate-tax-could-reduce-american-giving-85166">Oct. 11, 2017</a> and <a href="https://theconversation.com/the-pall-that-the-tax-law-is-casting-over-charities-89440">Dec. 23, 2017</a>.</em></p><img src="https://counter.theconversation.com/content/94879/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Patrick Rooney is affiliated with the public policy advisory committees for Independent Sector and The Philanthropy Roundtable. The author and the IU Lilly Family School of Philanthropy have received grants, contracts, and donations from many foundations, corporations, charities, and individuals. However, none of them funded this research. The views expressed in this essay are strictly my own and do not reflect policy stances of Indiana University or the Lilly Family School of Philanthropy.</span></em></p>Philanthropists give for many different reasons, but bequests could decline by about $7 billion a year.Patrick Rooney, Executive Associate Dean for Academic Programs, Professor of Economics and Philanthropic Studies, IUPUILicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/922302018-02-21T16:34:59Z2018-02-21T16:34:59ZSouth Africa’s finance minister played the tax cards he had left: wealth and VAT<figure><img src="https://images.theconversation.com/files/207321/original/file-20180221-132663-8vf3yd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">When the going gets tough, taxes go up.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>South Africa’s <a href="http://www.treasury.gov.za/documents/national%20budget/2018/">2018 national budget</a> came with a raft of tax increases indicating the country’s desperation to address a growing gap in its public finances. These include a hike in Value Added Tax from 14% to 15%. Sibonelo Radebe asked Lee-Ann Steenkamp to highlight the key tax developments.</em></p>
<p><strong>What is your general impression of the budget speech?</strong></p>
<p>I’m cautiously optimistic. In his own words, the minister of finance Malusi Gigaba noted this was a tough but hopeful budget. The budget speech echoed the theme of rebuilding and restoration set out in President Cyril Ramaphosa’s <a href="https://theconversation.com/why-ramaphosas-moment-of-hope-is-built-on-a-fragile-foundation-92043">state of the nation address</a>.</p>
<p><strong>What is your impression around the key tax announcements?</strong></p>
<p>Given the increases in personal income taxes in previous years major tax instruments have reached their limit in being used to raise revenue sustainably. As a result the minister only had two options to work with – focusing on wealth transfer taxes and Value Added Tax (VAT). </p>
<p>The result was that estate duty and donations tax rates were increased from 20% to 25% (with certain thresholds applying). And the VAT rate was increased from 14% to 15%. This won’t be a popular choice for the trade unions. But the <a href="http://www.taxcom.org.za/">Davis Tax Committee</a>, set up by government to assess ways of improving the country’s tax policy, showed that a VAT adjustment would have the least detrimental effect on economic growth and employment over the medium term. In addition, the negative impact on poor households is mitigated by the zero-rating of basic foodstuffs.</p>
<p><strong>What are the main drivers of the tax developments?</strong></p>
<p>The tax proposals are designed to increase revenue collection. And the impending sugar tax (now called a health promotion levy) and carbon tax show that environmental and health considerations have begun to play a role in tax policy.</p>
<p>Overall, the tax policy measures are designed to raise R36 billion in additional revenue in the 2018/19 financial year. These measures are aimed at reducing the budget deficit and funding fee free higher education and training for students from poor households.</p>
<p><strong>Were there any missed opportunities from a tax perspective?</strong></p>
<p>To create more certainty for tax planning it would have been helpful if the minister had explicitly said something about the introduction of a wealth tax. The <a href="https://www.businesslive.co.za/bd/economy/2017-04-25-davis-committee-to-mull-wealth-tax/">Davis Committee</a> looked into the efficacy of a wealth tax. The options would be charging it as a land tax, as an annual net wealth tax or as a national tax on the value of property (over and above municipal rates). </p>
<p>A wealth tax raised on the value of land would be complex. For example, it can’t be assumed that all private land owners are wealthy individuals. In the same vein, a national tax on the value of property would suffer similar shortcomings to an annual land tax. Thresholds would have to be used as well otherwise ownership would be used as a proxy for wealth.</p>
<p>An annual wealth tax would also be extremely complex and would probably lead to increased compliance and enforcement costs for the South African Revenue Services. This raises the question: would the cost be worth the additional tax revenue? We don’t know. What’s clear is that further in-depth research is required by the Davis Tax Committee, followed by a broad public consultation process. </p>
<p>At the very least the finance minister should have highlighted the issue in his speech. Policy transparency goes a long way in assuring investors (and taxpayers) that their money is in safe hands.</p>
<p><strong>Any other thoughts?</strong></p>
<p>The minister admitted that corrupt and wasteful expenditure by the government had eroded taxpayers’ trust in the state. This is a good starting point. But we’ve heard acknowledgements like this before, with very little (if any) progress afterwards. </p>
<p>The next few months will be crucial to see how the promises made by Ramaphosa will play out. Hopefully the governance and accountability of the South African Revenue Services will get immediate attention.</p><img src="https://counter.theconversation.com/content/92230/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lee-Ann Steenkamp is affiliated with the South African Institute of Tax Professionals (SAIT).</span></em></p>The South African budget speech echoed the theme of rebuilding set out by President Cyril Ramaphosa in his state of the nation address.Lee-Ann Steenkamp, Senior lecturer, University of Stellenbosch Business School (USB), Stellenbosch UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/895122018-02-01T11:39:08Z2018-02-01T11:39:08ZCharity and taxes: 4 questions answered<figure><img src="https://images.theconversation.com/files/203479/original/file-20180125-100923-5s2l0y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">About 1 in 20 taxpayers may fill out this part of their returns beginning with the 2018 tax year.
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/taxes-focus-on-tax-form-line-184904708?src=g3Txu-dDJU_p-qKMgFIiJA-1-0">Sean Locke Photography/Shutterstock.com</a></span></figcaption></figure><p><em>Editor’s note: Patrick Rooney, associate dean for academic affairs and research at Indiana University Lilly Family School of Philanthropy, weighs in on why Americans who have lost incentives to give to charity through the new tax law may donate less from now on. The answers are based partly on questions he fielded from fundraising consultant and blogger <a href="https://michaelrosensays.wordpress.com/">Michael Rosen</a>.</em> </p>
<h2>1. What will affect giving the most?</h2>
<p>The biggest change is indirect: By roughly doubling the standard deduction, the tax code changes make giving to charity less of a bargain.</p>
<p>Only Americans who itemize their tax returns are eligible for the <a href="https://theconversation.com/why-congress-should-let-everyone-deduct-charitable-gifts-from-their-taxes-78323">charitable deduction</a>, a dollar-for-dollar reduction in their taxable income that lowers what they owe the IRS. </p>
<p>Researchers like me believe that the share of taxpayers who can take advantage of this tax break will <a href="https://theconversation.com/the-pall-that-the-tax-law-is-casting-over-charities-89440">plummet to about 5 percent</a> from roughly 30 percent.</p>
<p>That will make a big difference because most people who can take advantage of this tax break do. More than <a href="http://generosityforlife.org/wp-content/uploads/2017/10/Overall-Giving-10.5.17-jb-CJC.pdf">55 percent of U.S. households</a> said they made charitable gifts in 2014. But for those who itemize, my colleagues and I found that 82.4 reported having taken advantage of the charitable deduction. </p>
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<figcaption><span class="caption">Stacy Palmer, an editor with The Chronicle of Philanthropy, explains in a PBS NewsHour interview why nonprofits fear that the new tax law will depress charitable giving.</span></figcaption>
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<p>This hypothetical example shows how this could play out: Pharmacist “Josephine Doe” paid a 25 percent marginal tax rate on her US$100,000 income as a joint filer (under the old tax law). Because her family itemized, her $100 annual donation to a local animal shelter only cost $75, while Uncle Sam basically paid the rest through a tax break. </p>
<p>Under the new law, her family will take the standard deduction, making her charitable contribution no longer tax deductible. Giving $100 will cost $100.</p>
<p>We anticipate that the tax code changes will lead Americans and U.S. companies to donate roughly <a href="https://theconversation.com/the-pall-that-the-tax-law-is-casting-over-charities-89440">$21 billion</a> less per year to charity based on changes in the tax incentives.</p>
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<h2>2. Will economic growth make up the difference?</h2>
<p>Economic growth is unambiguously good for philanthropy because it tends to lead to more money in people’s pockets. Economists, including <a href="https://doi.org/10.1016/j.econlet.2010.10.016">John List</a> at the University of Chicago, have found that people give more when they have more money to give.</p>
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<p>But it’s hard to estimate how the changes in the tax law will affect growth, and we know that the changes will affect households differently based on their sources of income, number of children, the size of their mortgage and how high their state and local taxes are.</p>
<p>The University of Pennsylvania economists responsible for what’s known as the <a href="http://budgetmodel.wharton.upenn.edu/issues/2017/12/18/the-tax-cuts-and-jobs-act-reported-by-conference-committee-121517-preliminary-static-and-dynamic-effects-on-the-budget-and-the-economy">Penn Wharton model</a> and others forecast that the new law will boost growth by relatively small amounts – as little as <a href="https://www.morningstar.com/news/dow-jones/TDJNDN_201801259064/the-tax-law-just-one-month-old-is-roaring-through-us-companies.html">0.1 percentage point</a> – per year over the next decade, following a slightly larger boost in 2018.</p>
<p>In January, after mulling the tax law’s likely ramifications, the <a href="https://www.reuters.com/article/us-imf-economy-outlook/imf-raises-global-growth-forecast-sees-trump-tax-boost-idUSKBN1FB1TK">International Monetary Fund</a> raised its 2018 forecast for U.S. growth to 2.7 percent rate from a prior 2.3 projection.</p>
<p>Given the uncertainty about the impact of the new tax law on growth and the uneven effects anticipated, my colleagues and I have not factored a growth dividend from the tax law into our expectations.</p>
<h2>3. Won’t taxpayers give some of the money they save on taxes to charity?</h2>
<p>The average individual taxpayer will get a <a href="http://www.taxpolicycenter.org/taxvox/tcja-would-cut-taxes-average-1600-2018-most-benefits-going-those-making-300000-plus">$1,600 tax cut</a> in 2018, and a 1.6 percent after-tax income boost in 2019. </p>
<p>Typically, itemizing donors give about <a href="https://doi.org/10.1257/jep.25.2.157">3 percent of their income</a> to charity, and, as I noted earlier, people usually give more when they have more. But the tax changes’ effects will vary widely.</p>
<p>About <a href="http://www.taxpolicycenter.org/taxvox">80 percent</a> of households will initially get a tax cut, while 5 percent will face a tax increase, according to the <a href="http://www.taxpolicycenter.org/taxvox/tcja-would-cut-taxes-average-1600-2018-most-benefits-going-those-making-300000-plus">Tax Policy Center</a>. The rest will see their lot unchanged.</p>
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<p>The federal government has gotten rid of <a href="https://www.cnbc.com/2017/12/20/families-will-feel-the-pain-of-losing-this-tax-break.html">personal exemptions</a>, which will cause many Americans to pay <a href="https://www.jct.gov/publications.html?func=startdown&id=5054">higher tax bills</a>. Many families will <a href="https://www.investopedia.com/taxes/how-gop-tax-bill-affects-you/">lose more through that change</a> than <a href="http://www.christianitytoday.com/news/2017/december/big-families-gop-tax-reform-bill-child-tax-credit.html">they will gain</a> from taking the bigger standard deduction.</p>
<p>Plus, the millions whose <a href="https://www.curbed.com/2017/12/20/16797590/tax-bill-salt-real-estate-mortgage">state, local and property taxes or mortgage interest</a> payments exceed the maximum level for which deductibility is now allowed will have less after-tax income. They will surely consider giving less.</p>
<p>But since many of the tax code’s changes are temporary, even fewer Americans will probably be paying a smaller federal income tax bill than they would have without the new law by 2027.</p>
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<p>It’s a different story for companies, which will benefit tremendously as their top marginal rate declines from 35 percent to 21 percent. </p>
<p>Businesses, like people, give for many reasons, including tax incentives, so there’s no reason to expect corporate giving to decline in proportion with this <a href="https://www.thebalance.com/corporate-income-tax-definition-history-effective-rate-3306024">tax cut</a>.</p>
<p>Indeed, some corporations may actually make a point of donating more. However, based on past patterns, I expect corporate giving to decline by $1 billion a year in response to the tax rate cuts – not adjusting for possible growth.</p>
<h2>4. How will taxpayers react?</h2>
<p>Tax policies may not affect how some people give at all – especially <a href="https://theconversation.com/why-it-can-make-sense-to-believe-in-the-kindness-of-strangers-86271">extreme altruists</a> or <a href="https://www.oddee.com/item_99238.aspx">misers</a>. But the <a href="https://finance.yahoo.com/news/complete-guide-2018-tax-changes-115200441.html">new law</a> will probably affect most typical donors.</p>
<p>Seeing what happens may take years, however.</p>
<p>Because Congress passed the law in December, some <a href="https://www.cnbc.com/2017/11/28/boost-your-charitable-giving-this-year-in-case-the-gop-tax-bill-becomes-law.html">Americans front-loaded</a> their giving for 2018 and beyond. They wanted to itemize their deductions in 2017 for the next year or more if they expected to lose their tax break. </p>
<p><a href="http://www.nber.org/papers/w3273.pdf">That’s what happened in the mid-1980s</a>, the last time that Congress passed a sweeping tax package. Anticipating cuts, some households and businesses gave more to charity than they usually did beforehand. </p>
<p>Giving by the rich spiked, <a href="https://www.ntanet.org/NTJ/45/3/ntj-v45n03p267-90-effects-tax-reform-charitable.pdf">then declined</a> once those changes took effect. </p>
<p>There’s another sign that giving is bunching up: a spike in the number of <a href="https://theconversation.com/donor-advised-funds-charities-with-benefits-74516">donor-advised funds</a>, privately managed accounts that operate in many ways like personal foundations. Itemizers may deduct what they put in these accounts from their taxable income right away, even if they don’t give it to a charity for years.</p>
<p>Taxpayers who otherwise won’t be able to itemize can do so by stowing, say, the money they plan to give away over the next few years in one of these accounts in a single year and allocating those funds over the next several years to their favorite nonprofits. </p>
<p>Indeed, Schwab Charitable, a leading provider of this philanthropic service, says that the number of accounts it opened <a href="https://www.businesswire.com/news/home/20180123005666/en/Schwab-Charitable-Reports-Record-Grants-2017-Unique">spiked 91 percent</a> in the second half of 2017 due to stock gains and tax concerns. </p>
<p>Employees of some of these financial institutions told me that they were working 20-hour days in the last two weeks of December to keep up with new clients who wanted to open donor-advised fund accounts before the tax rules changed to front-load some of their giving. </p>
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<a href="https://images.theconversation.com/files/203481/original/file-20180125-100896-1k20xay.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/203481/original/file-20180125-100896-1k20xay.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/203481/original/file-20180125-100896-1k20xay.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/203481/original/file-20180125-100896-1k20xay.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/203481/original/file-20180125-100896-1k20xay.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/203481/original/file-20180125-100896-1k20xay.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/203481/original/file-20180125-100896-1k20xay.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/203481/original/file-20180125-100896-1k20xay.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Only the very richest Americans leave behind estates that are subject to an inheritance tax.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/man-suit-showing-where-testator-must-197605481?src=BkhVsbdFgJp0xphLXFU1Fg-1-29">nito/Shutterstock.com</a></span>
</figcaption>
</figure>
<p>Finally, the new law changes rules governing the estate tax, a levy on inheritance, by <a href="http://money.cnn.com/2018/01/09/pf/taxes/estate-tax/index.html">doubling exemption levels</a>. For the next decade, estates left by deceased individuals worth $11 million or less will pay no taxes for the next decade, along with those left behind by couples who possessed up to $22 million. An unchanged <a href="https://www.law.com/thelegalintelligencer/sites/thelegalintelligencer/2018/01/09/the-impact-of-tax-cuts-and-jobs-act-of-2017-on-estate-planning/?slreturn=20180024074515">40 percent marginal rate</a> applies to fortunes that are bigger than than the cutoffs.</p>
<p>The Joint Committee on Taxation, a congressional committee charged with estimating the <a href="https://www.jct.gov/publications.html?func=startdown&id=5060">impact of fiscal legislation</a>, estimates that <a href="https://www.forbes.com/sites/ashleaebeling/2017/12/21/final-tax-bill-includes-huge-estate-tax-win-for-the-rich-the-22-4-million-exemption/#6fe888e61d54">1,800 estates will pay</a> the estate tax in 2018, a steep drop from the approximately 5,000 estates it says would have had to pay it without the new tax law. I expect this change to reduce the incentive for wealthy Americans to bequeath money to charity, sparking a roughly $7 billion annual decline in giving through bequests.</p><img src="https://counter.theconversation.com/content/89512/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Patrick Rooney and his employer, the Indiana University Lilly Family School of Philanthropy, receive funding from many foundations and charities. Similarly, Rooney and other Lilly School faculty and staff members are affiliated with legal and advisory boards for many charities.</span></em></p>The lost incentives to give are likely to make a bigger difference than the small uptick in economic growth expected from the new law.Patrick Rooney, Executive Associate Dean for Academic Programs, Professor of Economics and Philanthropic Studies, IUPUILicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/885132017-12-06T11:20:12Z2017-12-06T11:20:12ZHow the tax package could sap the flow of charitable giving<figure><img src="https://images.theconversation.com/files/197856/original/file-20171205-23009-zkysmc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">House Speaker Paul Ryan, left, leads a round of applause after his colleagues took a step toward changing the tax code.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Congress-Taxes/2f6deeb69c144709a30fb0d188b8f55b/1/0">AP Photo/Jacquelyn Martin</a></span></figcaption></figure><p>The tax bills currently making their way through Congress could end up making Americans less charitable. </p>
<p>The bills that recently cleared the House and the Senate, which <a href="http://www.cnn.com/2017/12/04/politics/gop-tax-plan-conference-committee-house-vote/index.html">need to be reconciled</a>, would have different consequences for <a href="http://www.taxpolicycenter.org/model-estimates/charitable-contributions-and-tcja-nov-2017/t17-0265-effective-marginal-tax-benefit">charitable giving</a>. But both would raise the price of donating for millions of Americans, thereby reducing how much the nation gives to charity overall. </p>
<p>The precise impact of this tax code overhaul, however, would depend on which provisions wind up on the books. </p>
<p>As an economist and a scholar of philanthropy who researches how public policies shape charitable giving, I have been following the pending tax proposals closely and examining their potential impact. My research suggests that the proposed changes could lead Americans and U.S. companies to donate roughly US$20 billion less per year to charity.</p>
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<h2>Standard deduction and tax rates</h2>
<p>One of the primary ways giving could be reduced is through two of the tax plan’s key features – significantly boosting the standard deduction and cutting the top marginal tax rate. </p>
<p>Research I co-led showed that such changes, based on an earlier version of the tax plan, would reduce household charitable giving by <a href="https://theconversation.com/why-congress-should-let-everyone-deduct-charitable-gifts-from-their-taxes-78323">$13.1 billion</a> per year. That would mark a 4.6 percent decline from the <a href="https://theconversation.com/what-influences-american-giving-78800">$282 billion</a> American households gave in 2016. </p>
<p>We also determined that the share of households that itemize their tax returns would fall to approximately 5 percent from the current 30 percent. </p>
<p>While we based our estimates on a reduction in the top rate from 39.6 percent to 35 percent and a 75 percent increase in the standard deduction, the current House and Senate bills differ slightly from that baseline and each other, both in terms of top marginal tax rates and where they kick in for different income levels. For example, both bills would increase the standard deduction by 90.5 percent. </p>
<p>These ongoing differences make it hard to discern what the precise differences would be. But if the changes in the latest versions become codified, the share of filers who get a tax break – a built-in incentive – for their charitable gifts would fall even further than my team had estimated.</p>
<p>In short, I now anticipate the loss to charitable giving from the tax code changes to top our estimate of $13.1 billion.</p>
<h2>Estate tax</h2>
<p>Both bills would also reduce the incentive to give after a wealthy taxpayer dies.</p>
<p>The <a href="https://theconversation.com/how-closing-the-door-on-the-estate-tax-could-reduce-american-giving-85166">estate tax</a> encourages giving with a dollar-for-dollar deduction from estate and gift tax liabilities matching any amount of money bequeathed to charities after death. In other words, if you owe a tax of $5 million on your estate, you could give $100,000 to charity and lower your IRS bill to $4.9 million.</p>
<p>The number of families this actually applies to is tiny, after growing smaller in recent years. Only one in 500 estates belonging to the people who die in any given year owe anything, after Congress sharply increased the threshold under which estates are exempt from the tax. And rich families rely on loopholes to get out of it or <a href="https://www.bloomberg.com/view/articles/2014-01-30/only-idiots-pay-the-45-estate-tax">reduce the tax’s impact</a>.</p>
<p>Currently, <a href="https://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-about-the-federal-estate-tax">estates under $5.5 million</a> are exempt for taxpayers filing as individuals and estates twice that size for couples.</p>
<p>The Senate bill calls for doubling current exemption levels to $11 million for an individual and $22 million for couples. The House plan would double exemption levels and then end the estate tax altogether in 2024. </p>
<p>Estimates regarding the effects of repeal range widely. However, there is complete consensus that doing away with this levy would reduce charitable bequests and donations wealthy Americans make during their lifetimes.</p>
<p>Based on my analysis, I anticipate that doing away with the estate tax altogether would cut giving by approximately $7 billion per year. </p>
<p>Levying it on the extremely small share of the very wealthiest households would surely reduce how much money is left to charities from current levels. But it is hard to extrapolate the approximate impact of this change because no researchers have modeled estimates with these levels of exemptions and tax rates.</p>
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<h2>Corporate giving</h2>
<p>Companies and corporate foundations donated $18.6 billion in both cash and in-kind goods and services to U.S. charities in 2016, according to the <a href="https://theconversation.com/what-influences-american-giving-78800">Giving USA report</a>, which the Indiana University Lilly Family School of Philanthropy researches and writes in partnership with the Giving USA Foundation. </p>
<p>My colleagues and I have not yet thoroughly studied how the pending reductions in corporate marginal tax rates might affect how much money businesses give to charity. But our models do show that the proposed reductions in the top corporate tax rate from 35 percent to 20 percent would reduce the incentives for corporations to give. </p>
<p>Businesses give for many reasons. However, it is reasonable to expect that dramatically cutting the top corporate tax rate would reduce corporate donations by an estimated $1.4 billion – a 7.6 decline from the amount business gave in 2016. </p>
<h2>Johnson Amendment</h2>
<p>The House bill includes a provision that would leave churches and other nonprofits, which by law must be nonpartisan, far more free to engage in political speech than they are today.</p>
<p><a href="http://thehill.com/opinion/finance/359330-theres-a-wolf-in-sheeps-clothing-hiding-in-the-gop-tax-bill">Nonprofit leaders</a> warn that this measure, left out of the Senate version, could have major consequences.</p>
<p>Watering down this restriction – known as the <a href="https://theconversation.com/how-the-tax-package-could-blur-the-separation-of-church-and-politics-87285">Johnson Amendment</a> – is <a href="http://www.publicconsultation.org/wp-content/uploads/2017/11/Johnson_Amendment_Quaire1117.pdf">wildly unpopular</a> with the vast majority of American voters, according to surveys. I suspect that it would be even less popular if more people understood the potential effects of this change on charities.</p>
<p>If churches and all other charities were to become largely able to endorse and support political candidates and retain their tax-exempt status, as the House’s tax bill would do, it would suddenly change the longstanding differences between giving to charities instead of explicitly political organizations and lobbying groups. </p>
<p>Currently, taxpayers may deduct their gifts to charities but not the money they donate to lobbying outfits and political parties.</p>
<p>If donations that are essentially political became tax-deductible, some donors would be likely to reallocate donations to charities, including new supposedly charitable entities created expressly to raise money to lobby for political causes. </p>
<p>Following such rejiggering, the consequences of this shift would reduce federal revenue by an estimated <a href="https://www.usatoday.com/story/news/politics/2017/11/10/tax-bills-repeal-johnson-amendment-could-cost-taxpayers-more-than-1-billion/852554001/">$2.1 billion</a> over 10 years, the nonpartisan Joint Committee on Taxation calculates. </p>
<p>While this change might create the appearance of an increase in charitable giving, it would be misleading to see the reallocation of giving from political parties and causes to politically charged charities as an authentic improvement for the charitable sector as a whole.</p>
<h2>Dynamic scoring</h2>
<p>Economic growth, of course, is good for philanthropy.</p>
<p>People tend to give less to charity during economic recessions and give more when times are better. After adjusting for differences in inflation, total giving fell an average of 0.5 percent annually during years when the U.S. economy was in recession since 1957. </p>
<p>On the flip side, the sum total of donations grew an average of 4.5 percent per year during boom times, <a href="http://www.givingusa.org">according to</a> <a href="https://store.givingusa.org/products/giving-usa-2017-report-highlights?variant=37727126089">Giving USA</a> data. </p>
<p>For multiple reasons, most research regarding the effects of tax policy on philanthropy does not use “dynamic scoring,” however. That is, it does not account for the potential economic growth effects tax policies are expected to have (or not) on growth.</p>
<h2>Universal charitable tax deduction</h2>
<p>So what could lawmakers do if they wanted to avert this outcome?</p>
<p>The most straightforward way to prevent the tax code overhaul from reducing charitable giving would be to let <a href="https://theconversation.com/why-congress-should-let-everyone-deduct-charitable-gifts-from-their-taxes-78323">all taxpayers deduct</a> donations from their taxable income. </p>
<p>My team and I have modeled the effects of this approach, which many <a href="https://www.councilofnonprofits.org/article/national-council-of-nonprofits-statement-the-universal-charitable-giving-act-hr-3988">nonprofit leaders</a> are urging Congress to adopt.</p>
<p>New bills that would do that are pending in both the <a href="https://www.congress.gov/bill/115th-congress/house-bill/3988">House</a> and the <a href="https://www.lankford.senate.gov/imo/media/doc/UniversalCharitableGiving_Lankford.pdf">Senate</a>. Both would create a universal deduction for non-itemizers, and both of them would cap this tax break at gifts equal to one-third of the standard deduction. </p>
<p>While the proposed caps would offer no incentive to give above the limit, and, therefore, it would be better without caps, those thresholds are high enough that they are unlikely to affect many otherwise ineligible taxpayers’ giving patterns.</p>
<p>So far, however, provisions along these lines are not on the table as part of the broader package.</p><img src="https://counter.theconversation.com/content/88513/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Patrick Rooney and the Indiana University Lilly Family School of Philanthropy have received millions of dollars of grants to fund research that benefits the philanthropic sector generally and many charities specifically. Rooney has consulted with and been affiliated with the advisory committees and legal boards for numerous charities and foundations over the years. None have funded this essay or have provided feedback on it in advance of its release. </span></em></p>More than US$20 billion per year in giving is potentially at stake.Patrick Rooney, Executive Associate Dean for Academic Programs, Professor of Economics and Philanthropic Studies, IUPUILicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/848712017-09-29T02:33:04Z2017-09-29T02:33:04ZTax ‘reform’ for the rich: Trump’s plan abandons his working-class supporters<figure><img src="https://images.theconversation.com/files/188102/original/file-20170929-1449-1apbja0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Trump's tax plan will cost trillions. </span> <span class="attribution"><span class="source">AP Photo/Pavel Golovkin</span></span></figcaption></figure><p>President Donald Trump heralded his new tax plan as <a href="http://www.foxnews.com/politics/2017/09/26/trump-vows-tremendous-middle-class-tax-cuts-millions-jobs-with-new-tax-plan.htm">relief for the middle class</a>, revenue-neutral and a “<a href="http://www.nydailynews.com/news/national/trump-promises-middle-class-miracle-tax-plan-detail-article-1.3525658">middle-class miracle</a>.”</p>
<p>Yet the <a href="https://www.nytimes.com/2017/09/27/us/politics/trump-tax-cut-plan-middle-class-deficit.html?mcubz=1">proposal</a>, announced on Sept. 27, does none of these things. Instead, it is a scam not fit to become law of the land because it will enrich the rich, explode the deficit and hurt many middle-class Americans. This may sound like strong language, particularly for an economist, but I’m going to show you why this is no exaggeration.</p>
<p>While some details remain up in the air, <a href="https://www.washingtonpost.com/business/economy/gop-tax-document-reveals-plan-for-massive-tax-cuts-preserves-key-deductions/2017/09/27/684ea40e-a387-11e7-ade1-76d061d56efa_story.html?hpid=hp_no-name_no-name%3Apage%2Fbreaking-news-bar&tid=a_breakingnews&utm_term=.c03437517557">Trump has proposed</a> three main changes to our tax code. He wants to repeal the estate tax, simplify the individual tax code and slash the rates corporations pay. Let’s consider each in turn. </p>
<h2>Killing the ‘death tax’</h2>
<p>The estate tax <a href="http://www.thefiscaltimes.com/2017/08/25/Trump-Wants-Eliminate-Estate-Tax-Here-s-Who-Would-Benefit">currently exempts</a> the first US$5.5 million of wealth for individuals and $11 million for married couples. It is paid by only the <a href="http://www.taxpolicycenter.org/briefing-book/how-many-people-pay-estate-tax">wealthiest 0.2 percent</a> of Americans, or fewer than 15,000 people in 2016.</p>
<p>While some dub it the “death tax” resulting in “double taxation,” <a href="https://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-about-the-federal-estate-tax">about 55 percent of the wealth subject to it</a> has never before been taxed. It is assets, like stocks and homes, that have appreciated in value but not sold. </p>
<p>While <a href="https://www.washingtonpost.com/news/fact-checker/wp/2017/09/28/fact-checking-president-trumps-tax-speech-in-indianapolis/?utm_term=.69e09e39b23d">Trump falsely claimed</a> its repeal will “protect millions of small businesses and the American farmer,” the reality is that these small firms do not have to pay the estate tax. Eliminating it would allow a small fraction of very wealthy Americans to accumulate even more wealth, widening the chasm between rich and poor.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/188120/original/file-20170929-1449-66jqcz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/188120/original/file-20170929-1449-66jqcz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=376&fit=crop&dpr=1 600w, https://images.theconversation.com/files/188120/original/file-20170929-1449-66jqcz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=376&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/188120/original/file-20170929-1449-66jqcz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=376&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/188120/original/file-20170929-1449-66jqcz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=472&fit=crop&dpr=1 754w, https://images.theconversation.com/files/188120/original/file-20170929-1449-66jqcz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=472&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/188120/original/file-20170929-1449-66jqcz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=472&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Bernie Sanders is a strong opponent of repealing the estate tax, arguing too much wealth already goes to the top 0.01 percent.</span>
<span class="attribution"><span class="source">AP Photo/Manuel Balce Ceneta</span></span>
</figcaption>
</figure>
<h2>‘Relief’ for the middle class</h2>
<p>A second key element of the plan overhauls how individuals pay taxes by shrinking the number of tax brackets, doubling the standard deduction and eliminating personal exemptions. This is the part that is supposed to provide tax relief for the middle class.</p>
<p>Currently, the first $10,400 a single person earns goes tax-free (the standard deduction plus a personal exemption). For a married couple, it’s $20,800, plus $4,050 for each child.</p>
<p>By increasing the standard deduction and eliminating exemptions, Trump’s proposal would increase the earnings that escape taxation to $12,000 for single people and $24,000 for couples (with or without kids). After that the new tax brackets would kick in, starting at 12 percent (up from the current 10 percent).</p>
<p>But what Trump giveth with one hand, he taketh away with the other. That’s because any gains the middle class reaps from a higher standard deduction will be minuscule at best because of the loss of personal exemptions and the elimination of certain itemized deductions like state and local taxes and medical expenses. Many middle-class households will end up being worse off under this new tax regime.</p>
<p>With some details, like the mortgage deduction and charitable contributions, still unknown, we can’t be certain of all the winners and losers – except one: The rich will be much better off because the top tax rate will be cut from 39.6 percent to 35 percent.</p>
<h2>Corporate cuts</h2>
<p>The proposal’s third key component is a big tax cut for corporations to 20 percent from 35 percent. While Trump claims it primarily will benefit workers and create jobs, I see it as another bonanza for the wealthy. </p>
<p>Publicly traded companies don’t really pay income taxes. Their <a href="https://www.forbes.com/sites/timworstall/2011/09/22/corporations-do-not-pay-taxes-they-cant-theyre-not-people/#5acd50796222">shareholders, consumers and workers do</a>. And <a href="https://www.cbpp.org/research/federal-tax/corporate-tax-cuts-skew-to-shareholders-and-ceos-not-workers-as-administration">shareholders foot more than three-quarters of the bill</a>. That means if taxes are reduced, companies will make more money and pass most of that along to shareholders, who will benefit from bigger dividends and higher share prices. </p>
<p>This will primarily enrich the richest 1 percent because they <a href="http://www2.ucsc.edu/whorulesamerica/power/wealth.html">own half of all corporate stock</a>. Senior executives – also among the 1 percent – will be big winners as well because their pay and bonuses are <a href="https://hbr.org/2016/02/stop-paying-executives-for-performance">usually tied</a> to the value of their company’s stock. </p>
<p>Trump has tried to sell this tax cut by claiming U.S. corporate rates are the highest in the world, <a href="https://www.vox.com/policy-and-politics/2017/8/31/16228766/trump-us-corporate-business-tax-reform-world">making the U.S. less competitive</a>. While it is true that the statutory rates on corporate profits are greater in the U.S. than in other G-20 nations, effective rates in the U.S. are not the highest and <a href="https://www.cbo.gov/sites/default/files/115th-congress-2017-2018/reports/52419-internationaltaxratecomp.pdf">not that different</a> from these other developed countries .</p>
<h2>Paying for it</h2>
<p>Estimates of the cost of the Trump tax cuts vary, but <a href="http://www.crfb.org/blogs/big-6-tax-framework-could-cost-22-trillion">one reliable estimate</a> puts it at $2.7 trillion over 10 years, or $270 billion a year.</p>
<p><a href="https://www.cnbc.com/2017/09/28/trump-advisor-gary-cohn-says-we-can-pay-for-the-entire-tax-cut-through-economic-growth.html">Trump administration officials claim</a> the tax cuts will pay for themselves by generating economic growth. Neither history nor math bears this out.</p>
<p>Historically, large tax cuts have failed to produce the needed and promised growth. This is true of individual states like Kansas, <a href="http://www.kansascity.com/opinion/readers-opinion/guest-commentary/article156418934.html">which rescinded several tax cuts</a> after they failed to stimulate economic growth and created big deficits. It is also true of President Reagan’s 1981 tax cut, which, as <a href="https://www.washingtonpost.com/news/posteverything/wp/2017/09/28/i-helped-create-the-gop-tax-myth-trump-is-wrong-tax-cuts-dont-equal-growth/?utm_term=.25792e9857b4">one of its key architects noted</a>, failed to spur faster economic growth than the U.S. experienced during the 1970s.</p>
<p>Furthermore, even if Trump’s tax cuts did manage to achieve the 3 percent growth his treasury secretary <a href="https://www.reuters.com/article/us-milken-conference-usa-mnuchin-idUSKBN17X1XR?il=0">is currently touting</a>, this would not nearly be enough to offset the cost of the tax cuts. By my calculations, growth would have to be double that to result in enough additional revenue to offset the Trump tax cuts. </p>
<p>Given that economic growth at <a href="https://tradingeconomics.com/united-states/gdp-growth">its best sustained level</a> over the past 75 years averaged only 4 percent (from the 1950s to the 1970s), getting to 6 percent (from the current 2 percent) <a href="http://thegreatrecession.info/blog/us-2016-recession">is unlikely</a>.</p>
<p>That leaves spending cuts and borrowing to pay for a large tax giveaway to the wealthy – both of which would come at the expense of the middle class, a group <a href="http://thehill.com/homenews/administration/352745-trump-on-middle-class-tax-plan-its-not-good-for-me">Trump promised</a> to protect. </p>
<p>If Trump were to choose to cut spending to pay for some or all of it, he would inevitably have to take the money from programs like subsidized student loans and children’s health insurance programs that benefit middle-class Americans. And if he were to borrow the money, the increased debt levels would likely drive up borrowing costs on everything from car loans to mortgages, which would also <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4707673/">hurt the middle class</a>. </p>
<p>Just as a few brave Republicans prevented the repeal of the Affordable Care Act, will some say no to this reverse Robin Hood tax reform?</p><img src="https://counter.theconversation.com/content/84871/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Pressman does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>President Trump released details of his tax plan, which would essentially benefit the wealthiest Americans by repealing the estate tax and other changes at the expense of the middle class.Steven Pressman, Professor of Economics, Colorado State UniversityLicensed as Creative Commons – attribution, no derivatives.