Rewriting the tax code is at the forefront of the Republicans' agenda now that the GOP is in control of both the White House and Capitol Hill. Although there is much public debate over income taxes, the conversation over inheritance and estate taxes is often pushed to background.
Yet the estate tax has some potentially big consequences for nonprofits and civil society generally (not to mention that it powerfully shapes the character of American democracy). What Alexis de Tocqueville wrote in 1835 remains largely true today: "I am astonished that ancient and modern political writers have not attributed to estate laws a greater influence on the course of human affairs."
The estate tax in the United States has undergone a huge shift in the last decade and a half. In 2001, wealth that was passed on to heirs following a death was taxed at a rate of 55%, applying to estates larger than $650,000. Since then, the bar for exemptions has risen sharply every year to the point where the current estate tax only applies to estates larger than $5.49 million (for individuals), with a tax rate of 40%.
The mainstream GOP position is to repeal the estate tax, or as some like to call it scornfully, the "death tax." During the campaign trail, Donald Trump proposed abolishing the tax entirely. "No family will have to pay the death tax," he said on August 8, 2016 in Detroit, "American workers have paid taxes their whole lives. It's just plain wrong and most people agree with that. We will repeal it."
As it is today, the estate tax only affects a small fraction of Americans and by no means a large portion of "American workers." Under the current law, about 0.2% of Americans who die this year are expected to have taxable estates, far below the high-water mark of %7.7% in 1976, when the exemption bar was at $60,000.
But those few wealthy individuals in the highest tax brackets account for a big chunk of total charitable giving. So, how would the death of the "death tax" affect the nonprofit sector?
Experts on the one side say that freeing up the assets of high net worth donors will allow them to give even more to charity. Experts on the other side are afraid that the wealthiest will have less incentive to donate if the tax is entirely abolished, since giving to charity allows them to reduce their tax burden with charitable deductions.
It's hard to say which side is right. But according to a recent U.S. Trust report on high net worth philanthropy, gaining tax benefits only mattered to 18% of high net worth donors listing their top reason for donating to a particular organization (that's down from 2013, when 34% cited tax breaks). If these numbers are correct, then my hunch is that we will see some changes in total charitable giving over the coming years, but nothing revolutionary. From the study quoted above, it seem like by and large high net worth donors give just like the rest of us. Their number one reason for giving is their belief in the mission of the organization (54%). Then comes the belief that their gift can make a difference (44%), and experiencing personal satisfaction, enjoyment or fulfillment (39%).
Even if we don't see vast changes in total charitable giving over the coming years, we should be prepared to see the long-term societal effects of getting rid of the estate tax, especially as it relates to economic mobility and the dangers of creating an oligarchy. "What is most important for democracy is not that great fortunes should not exist," Tocqueville wrote, "but that great fortunes should not remain in the same hands. In that way there are rich men, but they do not form a class."