President Biden’s proposed wealth tax would likely spur more charitable giving, philanthropy experts say, although some tax analysts caution that the plan is still too vague for people to know its full impact on donors.
While the plan is unlikely to advance this year, congressional experts say that once an idea for a new tax is translated into a legislative proposal, the chances that it will be revived further down the road increase significantly.
While commonly referred to as a “billionaire” tax, the proposal would affect households worth more than $100 million. It would assess a minimum 20 percent tax rate on their income, although the proposal would be fully phased in only for taxpayers with more than $200 million in wealth. Perhaps the most notable feature of the plan is that it would apply to the increase in value of stocks and other liquid assets. Typically, those kinds of assets aren’t taxed until they are sold.
Philanthropy experts say the proposal could create new incentives for the wealthy to give, especially those holding stocks that have increased substantially in value.
Biden says the tax would raise about $360 billion over 10 years. Reports vary on how many people in the United States are worth more than $100 million. A 2015 study pegged the figure at more than 5,000, and at least 700 Americans are billionaires.
A 20 percent levy would be a significant increase from what the richest people in America currently pay in taxes. Billionaires pay an average federal individual income tax rate of 8.2 percent today, significantly less that what most Americans pay, according to a report from the White House Office of Management and Budget and the Council of Economic Advisers.
‘Quick Rush’ to Give?
Under the proposed new tax, donors whose wealth stands at $100 million or above would have to pay taxes on the increase in value of their unsold stock and other liquid assets. That would create an incentive for the wealthy to donate those assets before the increase in value can be counted as income.
Under current law, the wealthy can hang on to their stock indefinitely and potentially never pay taxes on it if they donate it to others when they die.
Ray Madoff, a Boston College tax law professor who is an expert on philanthropy, says the new tax would be “a very good thing for charitable giving” because people would be less likely to hold on to their assets if they have to pay taxes every year on the increase in value.
The change also could trigger a short-term burst of giving by donors who benefit from today’s 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 University of Southern California.
He says that is because donors are more likely to view the current law as giving them a greater benefit than the proposed one. Under the current rules, a donor can deduct the value of a gift to charity of stock or other asset that have grown in value from their total income, which reduces the taxes they owe. Also, since they didn’t sell the asset before donating it to a charity, they don’t have to pay capital-gains taxes on it.
Another way the proposal could spur more giving is that is that some wealthy people might want to give enough away to stay under the $100 million annual threshold, said Patrick Rooney, professor of economics and philanthropic studies at Indiana University Lilly Family School of Philanthropy.
Michael Nilsen, vice president for marketing, communications, and public policy at the Association of Fundraising Professionals, agreed the proposal likely would boost giving. He noted that it was more likely to change how much people who already donate to charity give, rather than create new donors among the wealthiest Americans. “It’s very possible that the proposed tax will incentivize more charitable giving,” Nilsen said in an emailed statement. “What form that giving takes, how it’s set up and distributed, and how many charities are impacted will be interesting to follow.”
However, Marcus Owens, a partner at Loeb & Loeb and former director of the exempt organizations division of the IRS, said that the wealthiest people often have extremely complicated, long-standing financial arrangements, including philanthropic planning that could negate any benefits for donating more under a billionaire’s tax.
Owens also noted that current tax law caps charitable deductions at 60 percent of adjusted gross income. If that provision remains in effect, wealthy people who hit that cap even before a billionaire tax is imposed may see no tax benefit from additional giving, Owens said.
“It’s a fairly complex situation,” he said. “I don’t know that it’s possible to conclude what sort of philanthropic impact it would have on giving, if any.”
Jeremiah Doyle, a senior vice president at BNY Mellon who advises wealthy families, says he hasn’t heard from any fundraisers or estate planners that the wealthy donors they work with are talking about changing the way they give in light of the proposal.
“It’s too early to tell,” says Doyle. “We’ll find out later on if this thing looks like it’s getting close to having a possibility of actually being enacted.”
He also worries that if the proposal were to become law, it could soon get struck down if Republicans gained more seats in Congress or a new administration came to power. If that were the case, Doyle says, he thinks that some donors might regret a rush to give before the law was enacted.
“People are going to think long and hard before they actually make sizable gifts to avoid this tax,” says Doyle. “They almost have to be certain that this thing is going to be enacted, and even if it is, who’s to say that it does not get reversed when you have a change of administrations.”
Legislative Long Game
Economists who study taxes on the ultra wealthy say they think people overestimate the impact of new taxes on charitable giving.
“Sometimes people get the false impression that philanthropy actually is a roundabout way to save money on taxes that exceeds the cost of the gift, and that just isn’t true,” says Duquette. “If you give your money away, then even if you do get some tax benefits, you still have less wealth than you did 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, people who are committed to social change and want to give to it at a high level, a change in tax law wouldn’t make a huge impact, but that’s assuming a certain level of commitment to giving,” Powell says.
There’s also the issue of whether the legislation can get any traction on Capitol Hill. Experienced congressional observers say there’s almost no chance that Biden’s proposal will be enacted this year.
“Given it’s an election year and a couple of moderate Democrats in the Senate have already expressed general skepticism of a wealth tax, I don’t think its prospects are very high at this point,” Nilsen said.
