Change Isn’t Always a Good Thing: Estate Tax Reform and Impact on Charitable Organizations and Low-Income Individuals and Families
Phyllis Taite (formerly Smith)
Florida A&M University College of Law
August 3, 2010
A billionaire from Texas died on March 28, 2010 leaving a substantial portion of his estate to his wife and children. Even under normal circumstances this fact would be newsworthy, but what makes the timing of his death more intriguing is the fact it occurred during a year in which the estate tax has been temporarily suspended. As a result of the billionaire’s death in the year 2010, billions of dollars that would have been payable to the Treasury, because those assets would have been subject to estate taxation, will not be subject to the estate tax until the death of those beneficiaries. This is because Congress has failed to respond to President George W. Bush’s tax cuts signed into law in 2001. When the Bush tax cuts were signed into law, most political, tax, and estate experts fully expected the 2010 suspension of the estate tax and sunset to reinstate the original exemption levels of 2001would never take place. Therefore, changing the existing tax laws, particularly the estate tax, was expected to eventually result in a better outcome whether in the form of an outright repeal or a significant increase of the exemption level.
When President Barack Obama took office in 2009, he inherited the county during a recession. Amongst the issues that needed to be addressed during the first year of his administration were the Bush tax cuts, specifically estate tax reform addressing the temporary suspension of the estate tax for the 2010 tax year. Needless to say, the estate tax reform did not happen and the timing of the temporary suspension is a bit ironic. Historically, transfer taxes were temporarily instated to raise revenue during the country’s financial time of need; the temporary suspension during the 2010 tax year comes at a time when the country is experiencing the worst financial crisis since the Great Depression.
When Congress adopted the estate tax as part of the Internal Revenue Code in 1916 it was, in part, to raise revenue. The estate tax was also adopted based on the policy reasoning that the estate tax would be a way to control undesirable societal effects believed to be associated with concentration of wealth in families and private nongovernmental organizations. Within a year of the adoption of the estate tax, the War Revenue Act gave rise to the charitable contribution deduction. The legislative history indicates that members of Congress believed the wealthier individuals would contribute to societal projects such as higher education and charities if provided the proper incentive to do so. The estate tax, as it relates to public charities and nonprofit organizations serves to restrain the accumulation of wealth which our government, at that time, viewed as both inefficient and threatening to federal democracy.
By implementing the charitable contribution deduction, Congress specifically sought to encourage charitable giving through the tax code. As such, the estate tax system of taxation and the charitable contribution deduction provisions, while mutually exclusive, were designed to be complementary and advance similar societal objectives. There is some evidence that demonstrates for a period of time the amount of wealth transferred within a family was reduced and the combination of the estate tax liability and charitable contributions deduction, the evidence suggests, was a factor in that reduction. Specifically, an important 1994 study that examined the tax returns for persons who died in 1982 found that the combination of charitable bequests, estate expenses, and taxes accounted on average for forty-one percent of the net worth (gross estate less debt) of decedents with gross estates over $10 million. Therefore, when the Congress enacts legislation regarding the estate tax, it will likely impact the charitable contribution market and vice versa.
Under the Obama administration, tax reform is part of the agenda. Among the theories suggested, primarily by Republican representatives and pundits, is estate tax repeal. If Congress were successful in passing legislation to permanently repeal the estate tax, the question becomes whether this act would impact charitable giving because the charitable contribution deduction would lose its status as a method of incentivizing charitable giving. This paper will demonstrate that by moving towards elimination of the estate tax and necessarily reducing a major incentive for charitable contributions, the impact that such repeal will have on charitable organizations. Further, this paper will address the impact that elimination of estate taxes may have on low-income individuals and families, specifically by through the loss of services provided by the charitable organizations dependent upon charitable giving. Furthermore, this paper will propose an appropriate estate tax level that would balance the multiple goals of revenue raising, curtailing economic aristocracy, and incentivize charitable giving.
Keywords: estate tax, charitable contribution deduction, estate tax reform
Date posted: August 5, 2010
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