Charitable Giving and the Taxation of Estates

William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

September 13, 2005

Mr. Chairman and Members of the Committee:

Thank you for inviting me to testify today. My testimony focuses on the ways in which estate tax reform or repeal would affect charitable giving. This written testimony briefly summarizes two articles I have co-authored on the topic. These articles are attached as appendices to the testimony.

The main point of my testimony is simple: Repealing the estate tax or cutting the top rate in the estate tax would have a significantly negative effect on charitable giving. This conclusion is the product of several important facts.

First, the estate tax encourages charitable giving at death by providing a deduction for charitable bequests. Less obviously, it also encourages giving during life. Charitable contributions made during life gain a double tax advantage: They reduce income taxes and they remove the assets from the estate and so avoid estate taxes as well. Aggregate giving from living individuals far exceeds aggregate charitable bequests. As a result, even if the estate tax is only a relatively minor determinant of charitable giving while alive, the impact of repeal on giving while alive could be a large component of the overall impact.

Second, a variety of different kinds of research implies that estate tax repeal would reduce charitable bequests by between 22 and 37 percent, or between $3.6 billion and $6 billion per year. Previous studies are consistent with this finding, and also imply that repeal would reduce giving during life by a similar magnitude in dollar terms. To put this in perspective, a reduction in annual charitable donations in life and at death of $10 billion due to estate tax repeal represents a 5 percent decline in overall charitable giving and implies that, each year, the nonprofit sector would lose resources equivalent to the total grants currently made by the largest 110 foundations in the United States.