Wealth transfers and charitable bequests

I'm going to write about estate taxes now. No, no, don't run away: this is important.

Today at Artful Manager, Andrew Taylor worries that what were once expected to be big transfers of wealth from aging baby boomers to their children, either through gifts or bequests, are not going to be so big after all, and that this will effect the fund-raising, sorry, development, strategies of arts organizations. He cites this New York Times article, although this piece by Tyler Cowen, also in the Times, gets more to the point: America has a low savings rate, this isn't going to turn around any time soon, and that means you don't get an accumulation of wealth - as a nation the US will reap what it sows.

Now, I think Tyler is right. However, there is something much more significant on the horizon regarding wealth transfers that will impact arts organizations, and that is the future of the estate tax.

The 2001 Bush tax "cuts" (scare quotes because they generated unsustainable deficits, meaning taxes will be raised again sometime, somehow - TANSTAAFL and all that - more accurate to call it a tax delay) set in motion the gradual elimination of the estate tax. At 2001 rates, estates with a net value of over $1 million faced a top marginal tax rate, applying only to the value of the estate above $1 million, of 55 percent. The Bush policy gradually raises the threshold estate value, and lowers the marginal rate, until finally in 2010 the estate tax would be completely repealed. But (don't laugh) in 2011 the estate tax would return to its 2001 structure; this was done so that on paper the estate tax cut would look sustainable.

And why does this matter to nonprofit arts administrators? Because charitable bequests from an estate are tax deductable, without limit. At a marginal tax rate of, say, 55%, and a threshold of $1 million, an individual with an estate of $11 million can give $10 million to the local symphony and $1 million to her children, or $5.5 million to her children and $5.5 million to the IRS. The tax makes charitable donations much more appealing.

If the estate tax were totally repealed, by how much would it reduce charitable bequests? A Congressional Budget Office technical paper from 2004 that drew from the top work of academic economists to form a consensus projection, estimated that repeal would reduce charitable bequests by 22% - with less incentive to donate, we would get less in donations. This is a very big number, and much more immediate than long-term trends in savings rates.

Where do the candidates stand? This post is admirably clear (except for the reference to the "death tax" - so named by advocates of the wealthiest Americans, in an effort to make it sound as though the estate tax applies to all mortal citizens, and not just the very wealthiest percentile). Obama would keep the estate tax at the 2009 rates for good. That means a $3.5 million ($7 million for couples - and remember the estate tax does not apply to transfers to a surviving spouse) threshold, and a marginal tax rate of 45%. McCain would set the threshold at $10 million, with a marginal tax rate of 15%. Note that the big effect in terms of incentives for donations is in the marginal tax rate - the bulk of estate tax revenues come from the huge estates, in the $ billions, and at that level the tax exempt threshold doesn't matter so much.

As a rough ballpark, back-of-the-envelope calculation, I think we could say that if total repeal would cut charitable bequests, compared to what we would get at the 2001 tax structure, by 22%, then the Obama plan would cut charitable bequests by about 5% and the McCain plan by 15%, compared to the 2001 tax structure, give or take.

Again, these are not small numbers, and involve immediate effects.