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Wealth Tax Will Stymie Charities

Updated: Apr 28, 2021

By: William L. Bricker and Juliya L. Ismailov

What do Elizabeth Warren and Warren Buffet have in common? Warren, one of the frontrunners in the Democratic primary race for the 2020 presidential election, like Buffet, the world’s wealthiest businessman, wants to help improve the lives of working-class Americans.

Buffet advanced this and other global philanthropic objectives when in 2006 he pledged a substantial share of his wealth, represented by Berkshire Hathaway stock, to the Bill and Melinda Gates Foundation (the “Gates Foundation”), the largest foundation in the world fighting poverty (with 1,500 employees on 5 continents).

Warren seeks to advance her fight against income inequality by increasing the government’s revenue through a wealth tax on the ultra-wealthy like Buffet. Under Warren’s wealth tax proposal called the “Ultra-Millionaire Tax,” households would pay a 2% annual tax on excess of net worth over $50 million (representing 0.01% of American households), and 3% tax on excess over $1 billion.

Never one to be outdone, Warren’s primary rival Bernie Sanders then proposed an even higher wealth tax in a proposal called Tax on Extreme Wealth, stating: “I don’t think that billionaires should exist.” Instead of Warren’s 2-3% rate, he proposes a 1-8% range on a wider wealth band of $32 million to over $10 billion.

Under both Warren’s and Sanders’ proposals, the issue affecting high net-worth Americans is the proposed claw-back or counting as wealth of assets previously gifted to trusts or donated to charities. For charitably-minded billionaires like Warren Buffet and Bill Gates, this means a charitable gift once made and deducted from income will continue to be subject to the wealth tax.

The overall impact, according to CNBC calculations based on the net worth figures in the Bloomberg Billionaires Index, would include annual wealth tax of $9 million levied on Jeff Bezos, followed by Bill Gates at $8.6 million, Warren Buffet at $6.6 million and Mark Zuckerberg at $5.8 billion.

Both candidates rely heavily in their proposals on an analysis by two French-trained economists Emmanuel Saez and Gabriel Zucman from the University of California-Berkeley on statistics of wealth inequality in America. A more detailed version of the proposal presented in the Brookings Papers on Economic Activity (BPEA) in September 2019, states: “Private wealth includes household wealth plus the wealth of non-profit institutions (university and foundation endowments, church buildings, etc.). The frontier between household and non-profit wealth is sometimes fuzzy, as in the case of private foundations controlled by wealthy individual donors, such as the Bill and Melinda Gates foundation.” [p.5] In other words, Saez and Zucman would count as part of private wealth, such as Bill Gates’, the endowment of his private foundation. In fact, they would count Warren Buffet’s contribution as part of Bill Gates’ wealth too.

The economists are specifically concerned with the current-year charitable deduction permitted for contributions first deposited with a private foundation or donor-advised fund, to be gradually spent down over future years on charitable causes. The argument for holding such depository of donations, rather than immediately disbursing grants, is to allow the time and care to identify effective charitable opportunities without rushing to spend the funds in the current year to obtain the charitable deduction for the donor. Saez and Zucman argue, on the other hand, that under the proposed wealth tax regime, tax-motivated charitable giving today for future use unfairly avoids the tax. Not including such deferred charitable gifts in the wealth calculation, in their own words, “could spur an increase in charitable giving among the extremely wealthy.”

The economists take the position that the committed and paid donations are somehow at risk of being manipulated and used by the donors for their own purposes if they control the foundation or the donor-advised fund. This is not a new concern. The Tax Code already seeks to balance (i) on the one hand, an upfront tax deduction to convince Americans to make current, irrevocable commitment to charitable causes in order to provide long-term financial security and stability to operating charities, with (ii) on the other hand, extensive rules under Sections 4940 through 4948 (Private Foundations) and 4966 through 4967 (Donor Advised Funds), of the Tax Code, to prevent potential abuse of such charitable vehicles. These rules include prohibitions on self-dealing by donors, an annual minimum distribution requirement of 5% of the foundation’s funds, and annual detailed information reporting of various types of potentially suspect transactions.

Even diehard Warren and Sanders supporters could bulk at the perception of a tax impacting charities, not just the ultra-wealthy, by diverting private funds earmarked for causes like education and equality to the government’s coffers. If the candidates are to survive the battle for the hearts and minds of Americans, they need to try to prove, if they can, that the likely retraction of private philanthropic giving replaced by public services funded by the wealth tax will have a net positive effect.

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