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October 06, 2014

Opinion: Tie Foundations' Excise-Tax Cut to Level of Giving

A Boston College law professor argues in a New York Times column that a proposal to halve the excise tax on foundations would not spur greater giving, as its proponents contend. Ray D. Madoff notes that foundations, which are legally required to distribute at least 5 percent of their assets annually, rarely donate more than that, even though doing so already triggers a tax cut.

Under current law, private foundations are charged a 2-percent tax on investment earnings unless their distribution exceeds their historic average, in which case the tax is 1 percent. A provision of the America Gives More Act now before Congress would apply the 1-percent rate flatly to all foundations.

Supporters say the current rules discourage philanthropies from making big payouts because it will raise their historic average and make it harder for them to quality for the lower rate in later years. Ms. Madoff suggests Congress solve this problem, and do more to free up the $600-billion sitting in foundations' coffers, by linking lower excise taxes to specific giving targets—for example, a 1-percent rate for foundations that donate 6 percent to 8 percent of their assets and no tax if they give more.

Read a Chronicle of Philanthropy opinion piece on the America Gives More Act.