Monday, July 14, 2008

Should the estate tax charitable deduction be capped?

Over at the Becker-Posner Blog, Judge Richard Posner discusses whether dogs as a class should really get $8 billion from the Helmsley estate, or if the probate judge should void so eccentric a bequest. See here for our earlier comment.

Posner suggests that so large a gift to, for example, save an endangered species might make sense to most people, while the same one for dogs, who already enjoy substantial support from their human companions, may not. Still, it is not appropriate for judges to second guess the motives of the testator (assuming competency).
However, a fundamental premise of normative economics is the subjectivity of values: value is determined by personal preference, and the preferences of adults who are compos mentis and back their preferences with money are not to be questioned by others unless the expression of those preferences would cause uncompensated harms to unconsenting third partie

Still, the prospect of a multi-billion dollar trust for dogs is so outrageous that Posner suggests an alternative remedy: capping the estate tax charitable deduction.
The size of the Helmsley trust does suggest that it might be sensible to impose a ceiling on the charitable exemption from estate tax. For example, the law might exempt the first $1 billion of a person's charitable gifts (whether made during his or her lifetime or at death), but above that level such gifts would be taxed at the ordinary gift and estate tax rates. It is hard to believe that such a change in law would significantly affect work incentives, and it would therefore be an efficient tax.

Becker agrees that testamentary intentions should be respected, but disagrees on limiting the tax incentives for charitable transfers. Rather, he would like to end the perpetual tax exemption that charitable foundations now enjoy.
The major concern about private charities and foundations is not that they are too large, but that their leaders often perpetuate their organizations beyond any reasonable duration, partly by transforming their goals over time. I believe a case can be made for keeping the tax exemption in place, but changing present laws to require charities and foundations to have limited durations, perhaps 30 years. That is, to introduce a kind of sunset provision for private charities and foundations. If they stayed in business beyond that time period, they would then be subject to significant wealth and income taxes

The John Olin Foundation by design closed its doors after 50 years for this very reason. As more and more capital becomes concentrated in tax-exempt philanthropic hands, proposals such as these will inevitably have to be given more serious consideration.

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