The Senate's Estate Tax Hypocrisy

The estate tax is the hardiest perennial of policy debates, and the fairness and revenue implications of Senators John Kyl and Blanche Lincoln's plan to reduce the rate and increase the exemption level have been amply covered elsewhere.

But I do find it slightly ironic that the Senate passed (51-28) this estate tax amendment on the same day that it "unanimously agreed...that no taxes should be raised on charitable contributions to pay for health care reform." This is a reference to President Obama's exceedingly unpopular proposal cap the top rate for charitable deductions at 28 percent, which is "something a number of charities complain will lead to a drop-off in charitable giving." I assume the senators who voted for the unanimous agreement feel the same way.

What's odd is that reducing the estate tax rate will also lead to a drop-off in charitable giving. And if the United States Senate is convinced that any decline in charity is unacceptable, then 51 senators should not have voted for the estate tax amendment.

Why does lowering the estate tax reduce charitable giving? Because it lowers the cost of the alternative -- ie, keeping your pile of money until you die. In 2004 the CBO found that raising the estate tax exemption to to either $2 million or $3.5 million would reduce charitable giving by a little less than 3%. Maybe that doesn't sound so bad. But the cap on deductions for charitable giving is estimated to reduce charitable giving by a little less that 2%. To a lot of people, including 100% of the United States Senate, that apparently does sound bad.

I've written about the charitable deduction elsewhere, and rehashing those arguments here would be getting a little tedious. If you think the country needs the current level of charitable giving, that's fine. If you think any decline in charitable giving is unacceptable, that's fine too. But the critics should be consistent. If we're happy with the current level of giving, why change the estate tax laws?