President Biden’s proposed wealth tax would likely spur more charitable giving, philanthropy experts say, although some tax analysts warn the plan is still too vague for people to know its full impact on donors.
While the plan is unlikely to move forward this year, congressional experts say that once an idea for a new tax is translated into a legislative proposal, the chances of it being revived later increase dramatically.
Although commonly referred to as a “billionaire” tax, the proposal would affect households worth more than $100 million. It would assess a minimum tax rate of 20% on their income, although the proposal is only fully introduced for taxpayers with more than $200 million in wealth. Perhaps the most notable feature of the plan is that it would apply to increases in the value of stocks and other liquid assets. Generally, these types of assets are not taxed until they are sold.
Philanthropy experts say the proposal could create new incentives for the wealthy to give, especially those who hold stocks that have risen significantly in value.
Biden says the tax would raise about $360 billion over 10 years. Reports vary on the number of people in the United States who are worth over $100 million. A 2015 study put the figure at more than 5,000, and at least 700 Americans are billionaires.
A 20% levy would be a significant increase over what the wealthiest people in America currently pay in taxes. According to a report by the White House Office of Management and Budget and the Council of Economic Advisers, billionaires today pay an average federal personal income tax rate of 8.2%, significantly lower than what most Americans pay.
‘Quick Rush’ to give away?
Under the proposed new tax, donors with wealth of $100 million or more would have to pay taxes on the increase in value of their unsold stocks and other liquid assets. This would incentivize the wealthy to donate these assets before the increase in value can be recognized as income.
Under current law, the wealthy can keep their shares indefinitely and potentially never pay taxes if they donate them to others when they die.
Ray Madoff, a Boston College tax law professor and philanthropy expert, says the new tax would be “a really good thing for charitable giving” because people would be less likely to keep their assets if they had to pay taxes every year on the increase in value.
The change could also trigger a wave of short-term giving from donors who benefit from current tax rules and want to take advantage of them before the changes take effect, said Nicolas Duquette, an economist and associate professor of public policy at the University of Southern California. .
He says this is because donors are more likely to view the current law as giving them a greater benefit than the proposed one. Under current rules, a donor can deduct the value of a donation to a charity of stocks or other assets that have increased in value from their total income, reducing the taxes they owe. Plus, because they didn’t sell the asset before donating it to charity, they don’t have to pay capital gains tax.
Another way the proposal could further spur giving is that some wealthy people might want to give enough to stay below the $100 million annual threshold, said Patrick Rooney, a professor of economics and philanthropic studies at Indiana. University Lilly Family School of Philanthropy.
Michael Nilsen, vice president of marketing, communications and public policy at the Association of Fundraising Professionals, agreed the proposal would likely boost donations. He noted that he was more likely to change the amount of donations from people who were already giving to charity, rather than create new donors among the wealthiest Americans. “It is very possible that the proposed tax will incentivize more charitable giving,” Nilsen said in an emailed statement. “What form this donation takes, how it is set up and distributed, and how many charities are affected will be interesting to follow.”
However, Marcus Owens, a partner at Loeb & Loeb and former director of the IRS’ exempt organizations division, said the wealthiest people often have extremely complicated and longstanding financial arrangements, including philanthropic planning that could negate any advantage to giving more. under the tax of a billionaire.
Owens also noted that current tax law caps charitable deductions at 60% of adjusted gross income. If that provision stays in place, wealthy individuals who reach that cap even before a billionaire tax is imposed might see no tax benefit in making additional donations, Owens said.
“It’s a pretty complex situation,” he said. “I don’t know if it’s possible to conclude what kind of philanthropic impact this would have on donations, if any.”
Jeremiah Doyle, senior vice president at BNY Mellon who advises wealthy families, says he hasn’t heard from any fundraiser or estate planner that the wealthy donors they work with are talking about changing the way they give to light. of the proposal.
“It’s too early to tell,” Doyle said. “We’ll see later if this thing looks like it’s about to have a chance of actually being adopted.”
He also fears that if the proposal becomes law, it could soon be overturned if Republicans win more seats in Congress or a new administration comes to power. If that were the case, Doyle says, he thinks some donors might regret rushing to donate before the law was signed into law.
“People are going to think long and hard before making large donations to avoid this tax,” Doyle says. “They have to be almost certain that this thing is going to be signed into law, and even if it is, who’s to say it doesn’t reverse when you have a change of administration.”
Long legislative game
Economists who study taxes on the ultra-rich say they think people are overestimating the impact of new taxes on charitable giving.
“Sometimes people get the false impression that philanthropy is actually a backdoor way to save tax money that goes beyond the cost of giving, and that’s just not true,” says Duquette. “If you give away your money, even if you get tax benefits, you still have less wealth than when you started, so that’s not really a reason why philanthropists do philanthropy.”
Alison Powell, who is a partner in the Bridgespan Group’s San Francisco office and advises wealthy philanthropists, agrees. “In general, for people who are committed to social change and want to contribute to it at a high level, a change in tax law would not have a huge impact, but it does require a certain level of commitment to give “says Powell.
There’s also the question of whether the legislation can get traction on Capitol Hill. Seasoned congressional observers say there is almost no chance that Biden’s proposal will pass this year.
“Given that this is an election year and that a few moderate Democrats in the Senate have already expressed general skepticism about a wealth tax, I don’t think its prospects are very high at this point,” Nilsen said.