Estate Tax's End Might Squeeze Charitable Aid

At the top of President George W. Bush's "compassionate conservative" agenda is his tax-cut package, including a push for full repeal of the estate tax.

Ronald Reagan used to say of his Republican Party that sometimes its right hand didn't know what its far right hand was doing. And that may be the best way to understand a juxtaposition of compassionate conservatism and the end of the estate tax.

To be sure, repeal of the estate tax seems a political winner. Republicans have adroitly shaped the agenda on this issue, changing the lexicon to make the benign-sounding term estate tax into the ominous and obnoxious death tax.

And the politics of this issue have changed, in part because a slew of middle-class baby boomers have, through a combination of pension plans and house ownership, reached the threshold where the estate tax kicks in. It's not just for Rockefellers anymore.

That fact enabled Republicans in the last Congress to reject any compromises, including a formal one proposed by Rep. Ben Cardin, D-Md., to raise the exemption immediately to more than $1 million, and informal offers to lift the exemption from its current $600,000 per person over time to $4 million or more and reduce the maximum rate from 55% to 30%, leaving only mega-estates subject to any estate taxes.

But if Republicans have maneuvered themselves onto the right side of the politics on this issue, the policy implications are a different matter. Ironically, this GOP triumph in tax politics could end up devastating the centerpiece of their new president's core philosophy.

That philosophy is built around encouraging private organizations and philanthropic initiatives, through exhortation and government policy, to supplement or usurp bureaucratic government social programs.

In fact, with its emphasis on a central role for faith-based institutions and tax incentives over bureaucracies, W's compassionate conservatism is not far different from his father's thousand points of light. A core tenet of both approaches is that $1 million spent by a private organization on a social goal--say, reducing poverty, ameliorating youth violence or encouraging adoption--is far better and more efficient than $1 million spent by a government bureaucracy on a government program.

Most Republicans, of course, including most conservatives, applaud this approach. So do many mainstream Democrats.

The thousand-points-of-light approach relies heavily on the generosity of the American people. And Americans are indeed generous, far more than other Western countries. Surveys show that about three-fourths of Americans contribute to charities, compared to fewer than half of the people in Germany or France. Those who give, give far more--an average of nine times as much per donor as the French.

Americans give because our culture encourages giving. But let's face it: Americans also contribute, and certainly give more, because the tax code provides large incentives to do so. The biggest incentive is through the charitable deduction in the income tax code. But a second and key one is the estate tax.

In the past couple of years, Bill Gates, through his foundation, gave a whopping $1 billion to fund scholarships for minority college students; we could call it a megawatt point of light. Technology entrepreneur Jim Clark gave $150 million to Stanford University to create a new biotechnology center.

Gates and Clark joined others in what has become a wave of donations of $100 million or more from both "old money" billionaires and the newer Nasdaq ones. Much of this money has come through family foundations.

Of course, the booming stock market helped increase the clout of these family foundations. But another major impetus has been the growth in the number of foundations. The overall number of grant-making foundations has jumped since 1980 from 22,000 to 47,000, and the growth has been even more marked among the largest ones.

Why this explosive growth in the number of foundations? Certainly, many people of means who are motivated to give find it easier and more efficient to channel their donations through a family foundation. And there are more people of means--very substantial means--than ever before.

But the growth of foundations is more than just the growth in numbers of people. The family foundation has become a foundation itself for estate planning, recommended widely by trusts and estates lawyers as a way for a wealthy individual or family to maintain control over assets and employ or involve family members in positive activities while moving massive assets away from any estate-tax liability.

To be sure, such recognized and generous philanthropists as Gates and Warren Buffett have talked openly about their plans not to leave their heirs with multiple billions, but instead to divest themselves of most of their assets before death.

Still: Take into account every altruistic impulse and motive, and the fact remains that without significant estate taxes, few billionaires would rush to put their billions into foundations, and they would be more tempted to leave the money directly to their family members.

The Bush initiative in faith-based institutions proposed this week includes bold plans to expand tax deductions for charitable contributions, even for those who don't itemize deductions. But that step doesn't begin to compensate for the losses to charities likely at the upper end of the income and assets spectrum.

Two Boston College researchers, John J. Havens and Paul G. Schervish, recently estimated that Americans will leave behind, conservatively, $41 trillion in wealth in their estates between 1998 and 2052. Under current law, 15% of that pot--$6 trillion--will go to charity. Repeal the estate tax, and the number would decline, perhaps to half that. Lose $3 trillion for points of light, and the alternatives are either bureaucratic government programs or systematic extinction of many points of lights.

Very likely, huge majorities in both houses of Congress would support dramatic reform of the estate tax, including sharp increases in exemption levels and cuts in tax rates. That would leave plenty of room for billionaire foundations and considerable private charitable giving. This would be a good time for the president-elect to coordinate the communications between the Republican right hand and the far right one.

Norman J. Ornstein is a resident scholar at AEI.

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