June 30, 2001

BIGGER AND BETTER PHILANTHROPY

Congress just rejiggered the estate tax, and made such a mess of the job that it will have to be done over in a few years. On the next go-round, why not design it so it encourages philanthropy? Simple: For each dollar left to charity, shelter one dollar from the estate tax.

Someone with a $20 million estate could create a foundation with $10 million, and leave the other $10 million to his heirs unencumbered.

People hate paying taxes, and estate taxes more than most. But they rather like giving away money, if they have it in sufficiently large amounts.

Harnessing this natural and commendable impulse to be thought well of could do a great deal of good.

There's a powerful lot of money out there. In a recent survey of the "new rich," the Economist newsmagazine cites a study by the Boston College Social Welfare Institute that estimates $41 trillion will pass from one generation of Americans to the next between 1998 and 2052. Imagine how much could be accomplished if the $6 trillion the institute says is likely to go toward philanthropy could be boosted to $16 trillion.

In a perfect world there should be no estate tax at all. It is unjust, counterproductive and ridiculously costly to collect. Someone who saves and invests prudently all his days loses more than half his savings to the government at death, while another who roisters through life squandering every penny pays nothing. Which sort of behavior ought society to encourage?

That's aside from the specific injustice of families who have to sell a cherished homestead or a family business to raise cash to pay estate taxes.

The purpose of taxes is to raise money for the necessary operations of government, not to carry out social engineering projects. But tax policy inevitably has social effects, and the makers of tax policy ought to consider what they are likely to be.

You'll hear the argument that the purpose of estate taxes is to prevent the rise of a hereditary propertied class. But unless you are prepared to countenance a completely confiscatory estate tax -- and there seems no political sentiment whatever in America favoring that -- the argument is silly.

If you have serious amounts of money, say $20 million, half of it is still serious money.

In Silicon Valley, the Economist notes, $10 mil is called "f...-you money; it throws off $500,000 a year in income so one need never work again.

But then again, in Silicon Valley, people with that kind of money turn around and start new companies. Or they did, once upon a sunny time, and they will again.

Americans, the Economist says, "seem to start giving chunks of their money away once they are worth around $20 million, whereas in other countries the threshold is more like $100 million."

A bank that conducted a survey of rich people found that roughly $3.4 million is the point at which they start to worry that too much money will be bad for their heirs' work ethic.

I hasten to point out that I am in no personal danger of having to worry about this problem, but it sounds about right. Speaking purely hypothetically, up to $3 million to $5 million I would leave to my son and his wife (and their children, should they have any). From $5 million to $10 million, I'd begin to look for ways to leave money where I thought it could do some good, and anything above $10 million, net of taxes, would go to charity. Avoiding estate tax plays no role in those decisions except that the money to pay the taxes, if any were due, would come directly out of the charitable part of the estate.

And then the government would waste the money, which is another good reason not to let them have it.

The current estate tax encourages giving, but only very inefficiently.

Money left to charity is not counted as part of the taxable estate. But taxes on the balance are not reduced, so the incentives to engage in tax planning rather than wealth creating remain.

Even under present estate tax rules, philanthropic bequests have increased. The Boston study found that the share left to charity was 34 percent in 1992 and 49 percent in 1997 for estates of at least $20 million.

There's also something of a fad for starting to give your money away while you're still around to enjoy the results. Bill Gates is a notable example, having given his foundation $21 billion. But other states have their own notable examples, such as Bill and Claudia Coleman, whose $250 million gift to the University of Colorado earlier this year was at the time the largest ever to a public university.

Admire people who give while they're still alive, reward them for continuing to give after they're gone, and people will give more. Isn't that better than taxing them for dying?

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