In a campaign filled with expensive tax proposals, Sen. Bernie Sanders (I-Vt.) has added one of the most eye-popping plans yet. He has proposed his own expanded version of a wealth tax plan famously championed by Sen. Elizabeth Warren (D-Mass.). However, Sanders’ plan could be so far-reaching that it would have dramatic impacts on some of the largest sources of charitable giving in the country.
Sanders’ wealth tax plan would start with a 1 percent annual rate on married couples’ net worth (halved for singles) over $32 million, scaling up to an 8 percent rate on wealth above $10 billion. These rates and brackets are significantly higher than Warren’s, which includes a 2 percent wealth tax on net worth above $50 million and a 3 percent tax on wealth above $1 billion. If such a high wealth tax were also applied to charitable foundations controlled by the richest Americans, it could have even more dramatic impacts than simple redistribution of resources.
Charitable foundations distributed more than $75 billion in 2018, making up a substantial percentage of total American charitable giving. Americans of all income levels are generous, providing their own income and assets to provide better schools, better housing and better living conditions to individuals across the globe. Charitable foundations created by the wealthy amplify these pursuits. The largest of these — and consequently the foundations with the largest total grants — would be hit hard by wealth tax proposals.
Sanders’ advisers have advocated for including the assets of such foundations when calculating wealth tax liabilities under the plan. In other words, a Bill Gates or a Michael Bloomberg would not only face a tax on their personal holdings but on their philanthropic activities as well. This would have the effect of undermining enormous amounts of charitable activity funded by foundations established by wealthy Americans.
The Bill and Melinda Gates Foundation, for example, the largest private foundation in the world, would be in for a huge tax bill if Sanders’s proposal became law. The combined assets of the Gates’ themselves and the Foundation total roughly $150 billion. A back-of-the-envelope calculation suggests that the total wealth tax bill for those assets would surpass $11 billion in just the first year. That tax bill would represent more than two years’ worth of charitable expenditures for the foundation, which spent $5 billion on anti-disease, anti-poverty and nutrition programs around the world in 2018. In other words, instead of spending dollars alleviating human misery, the Gates Foundation and charitable entities like it would pay enormous tax bills to the federal government.
Over time, these tax bills will result in one of two undesirable outcomes. Either the Gates Foundation would have to reduce its annual giving to handle the new tax liability, or its endowment would shrink rapidly, giving it less capacity for charitable spending in the future. In either case, the tax would result in fewer assets going to individuals and countries in need.
While popular in some circles, wealth taxes are often misleading to an electorate accustomed to tax rates on income or consumption — put simply, wealth tax rates look lower than they are. A single-digit rate for an income tax is relatively low. On the other hand, an 8 percent wealth tax rate would be far more significant, as it applies to all wealth, every year, not simply income earned in a given year. Since very few assets appreciate at a rate higher than 8 percent annually, Sanders’ proposal is equivalent to well over a 100 percent income tax rate at that level. The deleterious impacts of this style of tax is a large part of why most other OECD countries are moving away from wealth taxes, not toward them.
However the tax liability gets divvied out, Sanders’ wealth tax would be devastating to private foundations’ charitable giving. By turning previously tax-exempt charitable foundations into a tax liability, Sanders would be hamstringing a crucial source of philanthropy and good in the world.
Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.
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