Effects of Estate Tax Reform on Charitable Giving

Jon M. Bakija and 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

June 17, 2003

Since 1916, the United States has imposed a
tax on the estates of the wealthiest individuals.
The 2001 tax cut reduces the estate tax
over time, and then repeals it as of 2010,
only to reinstate it in 2011. Because politicians
are unlikely to allow this pattern of
changes to occur, estate tax reform will
return to the policy agenda in the near future.

One of the most important issues in
assessing reform options is the impact on
charitable giving. The estate tax encourages
charitable giving at death by allowing
a deduction for charitable bequests. It also
encourages giving during life, as explained
below. But the tax reduces charitable gifts
by reducing the amount of wealth decedents
can allocate to various uses. The net
impact of these effects is ambiguous in

We find 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
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.1 The qualitative
conclusion that repeal would signifi-
cantly reduce giving holds even if repeal
raises aggregate pre-tax wealth and income
by plausible amounts.


In 2001, charitable contributions totaled
$212 billion, of which living individuals
gave 76 percent, bequests accounted for
8 percent, and foundations accounted for
12 percent (AAFRC Trust for Philanthropy
2002). Estate tax changes can plausibly
affect giving through all of these channels.

The remaining 4 percent was
donated by corporations. Charitable
bequests figure most prominently as a
source of gifts for educational institutions,
medical research institutions, museums,
and the creation and maintenance of
private foundations.

The federal estate tax currently applies
to net estates in excess of $1 million. The
net estate equals gross assets at death less
deductions for debts, spousal bequests,
charitable bequests, expenses of administering
the estate, and a few other miscellaneous
items. The marginal estate tax rate
varies between 41 and 49 percent, with the
rate rising as wealth does. The exemption
is scheduled to increase in steps, reaching
$3.5 million by 2009, while the top marginal
tax rate is scheduled to fall to
45 percent, before the tax is temporarily
eliminated in 2010.

In recent years, about 2 percent of
decedents have had to pay federal estate
taxes. Table 1 provides information on
charitable bequests and wealth reported on
federal estate tax returns filed in 2001.
Most of these returns represent people who
died in 2000, for whom the effective exemption
was $675,000. Charitable bequests
appeared on one-sixth of estate tax returns,
and amounted to $16.1 billion, or 7.5 percent
of the value of gross assets.

Both the likelihood of giving and the
share of estate given rise significantly with
wealth. These patterns are consistent with
the incentives created by tax rates that rise
with wealth. Of course, people may be
willing to give larger shares of wealth to
charity as their wealth rises for reasons
other than taxes. In any event, charitable
bequests are heavily concentrated among
the wealthiest estates. In 2001, 301 decedents
with gross estates in excess of
$20 million gave $6.8 billion to charity.
These decedents represented fewer than 1
out of every 8,000 deaths in that year, but
accounted for 42 percent of all charitable
bequests and made average bequests of
$23 million. Likewise, 64 percent of all
charitable bequests came from roughly
1,900 gross estates above $5 million.