The United States has a variety of policies that are designed to help working parents with the cost of child care, but those policies tend to be particularly complex and do little to help families with little or no income. While potential tweaks and alternatives have been debated for years, many experts are starting to unite around a new vision that could lift millions of children out of poverty and cut deep poverty in half while simplifying and improving benefits for all families, regardless of income.

Read on for an overview of the tax benefits available to families, where they fall short, and how a universal child allowance could work as an alternative.

Child Poverty in the United States

The child poverty rate in the United States is consistently higher than the rate in many other industrialized countries. Similarly, most other large countries provide some sort of universal benefit for all parents to help with the costs of raising a child. While the United States does have policies to help low-income families, the benefits don’t always reach those at the bottom of the income distribution, who are also the ones who need it most.

The chart below shows how child poverty in the United States compares to other countries in the Organization for Economic Cooperation and Development (OECD), based on the latest available data for each country.

While the moral case for helping children born into poverty at no fault of their own is certainly compelling, there is also a significant economic case for using government spending to address the issue. In an article published in the Journal of Children and Poverty, four researchers–Harry Holzer, Diane Schanzenbach, Greg Duncan, and Jens Ludwig–sought to quantify the cost of child poverty on the economy. They found that child poverty has large and measurable effects on costs like crime, lost productivity, and additional health spending. In total, child poverty has an estimated societal cost of about $500 billion per year, or about 4 percent of the GDP.

While estimating the exact cost of something like poverty is an inherently challenging thing to do precisely, which Holzer, Schanzenbach, Duncan, and Ludwig readily admit, the authors highlight the range of ways in which poverty can negatively affect society as a whole.

When it comes to fighting poverty, a growing body of research shows that providing cash assistance to families, particularly low-income families, is particularly effective and tends to pay off over a beneficiary’s lifetime. Interventions that provide assistance to very young children are particularly important, which is why many proposals to address poverty include an increase in funds for children under the age of six.

Current Child Benefits

To understand why many have started to think seriously about a universal child allowance, it’s important to look at how current child-related benefits work in the United States. Where there are several policies that seek to help parents, they can be complicated and most come with restrictions. A primary criticism of these policies is several of them actually do little to help those who need the most assistance, namely people with very low or no income.

Complicated Tax Policies

The United States currently has a handful of tax-related policies that seek to help working parents; each policy tends to target parents with different income levels. The Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) are two that do the most to help families with low incomes. The EITC is a refundable tax credit, meaning that if it lowers a person in a couple’s tax liability to zero, it refunds the rest so recipients get the full value regardless of the amount they owe in taxes.

While the EITC offers a credit to individuals and married couples without children, only those with very low incomes can benefit and the maximum amount is relatively small. That changes significantly for parents, both in terms of income eligibility and the maximum amount available. The average amount for a family with children was $3,186 in 2015 but just $293 for a family without children. The credit is designed to encourage people to work by offering more money for additional income up to a limit and then phasing out at a certain income level. The Center on Budget and Policy Priorities has a helpful interactive that shows how EITC amounts vary at different levels of income based on marital status and number of children.

Another tax credit is the Child Tax Credit, which has an additional component that also makes it refundable. Like the Earned Income Tax Credit, the refundable Child Tax Credit is designed to both encourage work and provide assistance for low-income parents. The CTC also phases out at a much higher level of income, meaning that it benefits a much larger range of people and is not only targeted toward the working poor. However, there is a minimum income level that people need to meet to benefit–people must earn at least $3,000 to qualify for it and they need at least $9,667 in income to get the maximum value. As a result, those with very little or no income are left out.

There are other tax policies that work to offset child care costs for middle and upper-income families while doing little for those with low incomes. The Child and Dependent Care Tax Credit allows parents to reduce their income tax liability by $3,000 per child up to a total of $6,000 but is not refundable. Similarly, the employer-provided childcare exclusion allows working parents to set aside up to $5,000 of income for child expenses without having to pay taxes on it. There is also a child exemption, which allows taxpayers to lower their taxable income by about $4,000 for each qualifying child.

While the non-refundable credits don’t really help people with the lowest incomes, it’s important to note that the credits directed toward low-income parents do play an important role in fighting poverty. According to the Supplemental Poverty Measure–which tracks people’s income after tax credits and government programs–the Earned Income Tax Credit and the refundable portion of the Child Tax Credit kept nearly 9.2 million people, including 4.2 million children, out of poverty in 2015.

A Universal Child Allowance

In light of the complex nature and limitations of current benefits, a growing number of experts have started to support the idea of a universal child allowance. While the concept of a universal child allowance could take several different forms, the general idea behind it would be to consolidate some or all existing policies into one benefit that is available to all parents, regardless of income. Doing so would expand tax policy to benefit all children and would have a particularly significant impact on those living in poverty. And if set to the right amount, experts believe that a policy could be designed in a way that doesn’t leave families worse off after eliminating existing benefits like the child exemption and child tax credit.

While we don’t yet have a fully fleshed out proposal with all of the details for what a universal child allowance would look like, and the details are important, people have modeled some possible options to give a general idea of what various plans would mean for child poverty. Researchers at The Century Foundation estimated the costs and benefits of several different possible child allowance designs. For example, they project that a $2,500 per child benefit would have brought an additional 5.5 million children out of poverty in 2013. An allowance of $4,000 per child would have brought more than 8 million children out of poverty. Both policies would have decreased the child poverty rate from 18.8 percent to 11.4 percent and 7.8 percent respectively. Both would also dramatically reduce the number of children in deep poverty–children in families living at less than half of the poverty line–dropping that rate by 49 and 65 percent, respectively.

There is a wide range of proposals to develop some sort of universal benefit for children. Notable variations include a simple proposal that would give parents the same amount for every child, a tiered proposal that would give more to children under the age of six and less for children seven to 17, one that would decrease for each additional child, or some sort of combination of those. Alternatively, some argue that we should increase the value and progressiveness of the Child Tax Credit. The Century Foundation mapped several of those alternatives and found that expanding the Child Tax Credit would also reduce child poverty, but not to the same extent that certain universal benefit proposals would.

Proponents of a universal child allowance also argue that it would best be distributed regularly, rather than once a year when a family files its tax return. Ideally, the benefit could be distributed each month to help offset the costs related to raising a child as parents face them. This stability can help low-income parents budget their finances and ensure that children’s basic needs are met all year round.

Conclusion

While it may not be likely that the United States adopts a universal child allowance in the near future, the possibility may be more likely than one might think. Politicians on both sides of the aisle have supported efforts to expand the value of the existing tax credit, and many agree that existing child benefits could be simplified. While making existing policies more available to low-income families would amount to significant reductions in child poverty, a regular benefit available to all parents would go even further.

Child poverty in the United States has been a persistent problem for a long time. Many other advanced countries have adopted some sort of universal benefit for children and that is likely an important reason why child poverty rates in other countries are often lower than in the U.S. If politicians are serious about fighting child poverty, an emerging consensus among researchers suggests that a universal allowance may be the best way to approach the issue.

Kevin Rizzo

Kevin Rizzo is the Crime in America Editor at Law Street Media. An Ohio Native, the George Washington University graduate is a founding member of the company. Contact Kevin at krizzo@LawStreetMedia.com.

The post Universal Child Allowance: A Simple, Effective Way to Reduce Child Poverty? appeared first on Law Street.

The estate tax, more commonly known as the “death tax,” is one of the most hated taxes in the United States. Long considered to be a contentious issue in the tax policy field, Americans are largely not comfortable with the concept of taxing inheritances. However, estate taxes align perfectly with America’s historical idea of fairness and not encouraging wealth to accumulate long after death. Despite citizens’ contempt for taxes at death, few will ever actually be subject to the estate tax. Read on to learn more about the estate tax, and what happens to our money after we die.

Evolution and History of the Estate Tax

The Internal Revenue Service defines the estate tax as “a tax on your right to transfer property at your death.” Taxation at death can be traced back as far as ancient Egypt, around 700 B.C. In feudal Europe, it was also quite common to impose taxes on the death of a family member, normally amounting to a family’s annual property rent.

Early American government abolished laws that encouraged the accumulation of wealth over many generations. In 1777, Thomas Jefferson cited Adam Smith, a free market capitalist, when stating that “the earth and the fulness of it belongs to every generation, and the preceding one can have no right to bind it up from posterity.” The concept that people should control their estates after death was considered “manifestly absurd” by both Jefferson and Smith.

The modern estate tax evolved through the Stamp Tax of 1797 (taxes levied on required federal stamps on wills, inventories, and letters of administration), the Revenue Act of 1862 (the addition of a legacy or inheritance tax along with the stamp tax on the probate of wills or letters of administration), and the War Revenue Act of 1898 (a federal legacy tax proposed to raise revenue for the Spanish-American War, levied only on personal property).

The Estate Tax 1900 to Present

The Revenue Act of 1916 specifically created a tax on the transfer of wealth to beneficiaries. This levied a tax directly on the estate itself, rather than an inheritance tax. Over the next few decades, laws surrounding the estate and gift tax framework shifted immensely. A gift tax was repealed in 1926, then reintroduced in 1932; tax bases expanded; life insurance rules were modified to exclude insurance the decedent never owned; and marital deductions frequently changed. Significant tax law changes came around with the Tax Reform Act of 1976. This created a unified estate and gift tax framework; prior to this reform, it was far cheaper to give property away during life as gifts, as there was a higher tax rate applied at death. The generation-skipping transfer trust tax was also added to combat creative trust frameworks that paid money out to intervening beneficiaries, avoiding taxes altogether.

The Economic Growth and Tax Relief Reconciliation Act of 2001 allowed for a phasing-out of the estate tax, along with a lowering of annual top-rate estate taxes. It also lowered capital-gains taxes, in addition to lowering income taxes. Much of the resistance to the estate tax has come from powerful public relations campaigns and lobbying efforts. Many wealthy families have lobbied for years around an estate tax repeal and funded actions to make it a reality: including the Mars Chocolate family, the L.L. Bean family, and the Campbell’s Soup family.

The “Death Tax”

While citizens feel very strongly about the “death tax,” it only affects a small percentage of families each year. According to a 2016 Gallup poll, 54 percent of those polled supported a repeal of the estate tax. Under the current law, however, the 40 percent tax rate is applied only to estates worth more than $5.45 million for individuals and more than $10.9 million for married couples. If a decedent has an estate worth less than that, then it is automatically passed on to heirs completely tax-free. Additionally, individuals are able to give away $14,000 a year as a gift to an unlimited amount of people without incurring any tax.

So, an overwhelming majority of families in the U.S. are not subject to the estate tax. For example, in 2015, only 4,918 estates were subject to the tax, yielding $17 billion (less than 1 percent of federal revenue). From that number, 266 estates valued at $50 million or more brought in $7.4 billion in revenue. According to the Center on Budget and Policy Priorities (CBPP), 99.8 percent of estates are exempt from the estate tax. The CBPP also notes that $275 billion will be generated from 2017-2026 under the current estate tax law. While that is still less than 1 percent of federal revenue during that same period, it is more than the government will spend on the Food and Drug Administration, Centers for Disease Control and Prevention, and Environmental Protection Agency combined. Estate taxes clearly remain an integral source of revenue for the federal government.

Moreover, the interesting thing about many estates is that most will not ever actually be taxed. The CBPP estimates that 55 percent of the value of the estates worth more than $100 million are comprised of unrealized capital gains; those gains have not yet been taxed nor will they ever be taxed under current estate tax laws. Capital gains are only taxed when an owner of an asset “realizes” a gain; therefore, if an asset is held by an owner until death, increasing in value over the years, it will never actually be subject to income tax.

Generally, taxable estates pay less than one-sixth of their value in tax–roughly 16.6 percent, far below the top statutory rate. Additionally, the significant number of loopholes and generous deductions enable many estates to avoid taxes altogether. Hence, many families are able to pass on numerous assets to future generations tax-free due to advantageous laws.

Estate Tax Repeal

Republicans have long sought to repeal the death tax, and now thanks to President Trump, that dream may be realized. Abolishing it completely would save millionaires and billionaires in the U.S. roughly $20 billion a year in taxes. An action to repeal the estate tax would be beneficial only for the top 1 percent of families in the country, something that appears to be completely at odds with the working-class voters who helped to elect Trump. Under the current administration, passage of a bill to repeal the estate tax in the Republican-led House is practically certain; as for the Senate, a decade-long repeal is possible under a reconciliation which needs 50 senators. To repeal the estate tax permanently, 60 votes would be needed, which may be more difficult to garner.

“Donald Trump” Courtesy of Gage Skidmore : License: (CC BY-SA 2.0)

Opponents of the estate tax have contended that it hurts family farms and small businesses immensely. In reality, very few small businesses and farms owe any estate tax in a given year. In 2013, only roughly 20 small businesses and small farm estates were subject to the estate tax, and estimates show that those estates only owed about 4.9 percent of their value in taxes.

If repealed, President Trump’s estate alone would save about $564 million, based on his estimated net worth of $3 billion (although he has argued that his net worth is even higher). Trump’s team, which is comprised primarily of extremely wealthy individuals, would also benefit greatly from an estate tax repeal. However, a proposed plan to repeal the estate tax indicates a bit of compromise as well. Instead of capital gains being able to pass to heirs tax-free, those assets would be subject to a capital gains tax at death, with an exemption of the first $10 million in assets for family farms and small business owners. A tax on capital gains would only top out at 20 percent, while the estate tax is at 40 percent. Thus, repealing the estate tax and replacing it with a capital gains tax would be extremely beneficial for wealthy families. 

Conclusion

The estate tax is misunderstood by most Americans; despite all of the negative sentiments surrounding it, only a minuscule number of estates will be affected by it annually. In actuality, a repeal of the estate tax would only benefit a small number of incredibly wealthy families in the U.S., while simultaneously depriving the federal government of billions of dollars of revenue each year. When weighing the merits of the estate tax system, one should consider the benefits of allocating society’s resources and promoting equality over the potential consequences of binding the majority of assets and wealth into a small percentage of the American population.

Nicole Zub

Nicole is a third-year law student at the University of Kentucky College of Law. She graduated in 2011 from Northeastern University with Bachelor’s in Environmental Science. When she isn’t imbibing copious amounts of caffeine, you can find her with her nose in a book or experimenting in the kitchen. Contact Nicole at Staff@LawStreetMedia.com.

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Environmental taxes and “ecotaxes” are not a new phenomenon. Proponents of sustainability have advocated for environmental-impact taxes for a variety of products and activities. By requiring a tax, the goal is to drastically change behavior and encourage a more “green” lifestyle. Until recently, no significant research had been completed to determine the global environmental and health impacts of an environmental tax on food. Now, the journal Nature Climate Change has published the first global analysis of such a tax. Read on to learn more about these taxes. 

Environmental Taxes

Environmental taxes, or “ecotaxes,” are taxes on products or activities that are considered harmful to the environment. One of the central goals of a more “green” economy is having prices reflect the true cost of certain activities. The purpose of ecotaxes is to change people’s behavior and promote environmentally-friendly activities. Because the free market fails to address environmental concerns and sustainability, ecotax policies are meant to force the market to consider environmental impacts.

These policies are known as the “green tax shift.” Examples of these taxes include carbon taxes, waste disposal taxes, and taxes on pollution and other hazardous wastes. Generally, ecotaxes can fall into two distinct categories: revenue-motivated and incentive-motivated. Revenue-motivated ecotaxes are designed to actively change behavior by putting or increasing taxes on products or activites that are deemend harmful to the environment. Incentive-motivated ecotaxes instead take a different approach, offering tax credits and relief in exchange for consumers engaging in more environmentally-friendly behavior.

Currently, many products externalize environmental costs. This means that prices are placed at an artificially low value on non-renewable resources. Effects on the air, water, and soil are not taken into account when determining the price of a product. Thus, ecotax reform encourages internalizing these costs, so the long-term environmental consequences of economic activity are not completely ignored.

Agriculture’s Impact on Climate Change

Curbing climate change is of the utmost importance as the world moves further into the 21st century. At the forefront of mitigating the damaging effects of climate change is the agriculture industry. Perhaps what’s even more critical than regulating agriculture as a whole is focusing efforts on the meat and dairy industries. The global livestock industry contributes more greenhouse gas emissions than cars, planes, trains, and ships combined, though most people still mistakenly believe that transportation is the biggest contributor to climate change.

Changing consumer perception regarding meat consumption, however, is a difficult task to complete. Researchers and scientists across the world agree that changing dietary habits is crucial to curbing climate change. In a landmark report from the Intergovernmental Panel on Climate Change from 2014, researchers found that dietary changes have the ability to substantially lower emissions, despite very little global action to achieve those goals. Many calls to reduce meat consumption have been met with controversy and significant pushback.

Also, the rising demand for meat across the globe, including rapidly increasing meat consumption from heavily-populated countries such as China, may push climate change over the tipping point. Thanks to a rising population and more affordable meat prices, these products are being consumed at a higher rate than ever before. Recent peer-reviewed studies have shown that agricultural emissions will take up the world’s entire carbon budget by 2050, meaning every other industry like transportation and energy would have to be zero carbon.

An Environmental-Impact Tax on Food?

Food production and agriculture are massive contributors to greenhouse gas emissions. Recent research demonstrates that the global food system is responsible for roughly 25 percent of all greenhouse gas emissions. However, agriculture has never been included in American plans to reduce emissions. A brand new study suggests using an environmental-impact tax on food to combat this problem.

A study recently published in the journal Nature Climate Change states that if taxes were applied to food products based on the environmental impacts of their production, the environmental costs of agricultural activity could be substantially lowered. Specifically, climate taxes on meat and milk could lead to vital cuts in carbon emissions. The study is the first of its kind; the first global analysis of both the environmental and health impacts of a greenhouse gas on food.

The study runs through the environmental impact of each food type, figuring out the tax required to compensate for damage caused. Beef has the largest footprint, due to deforestation and massive methane emissions. Taxes of 40 percent on meat and 20 percent on milk would be substantial enough to account for the damage the production of these products causes people through climate change, the authors contend. Additionally, increasing the price of beef by 40 percent would likely result in a 13 percent drop in consumption. Some other taxes needed to compensate for climate change are 15 percent on lamb, 8.5 percent on chicken, 7 percent on pork, and 5 percent on eggs. Vegetable oil would require a 25 percent tax increase, but mostly because the initial price of the product is very low.

Some countries are already considering environmental impact taxes on food products. Denmark is one country that has already considered implementing a tax on red meat to fight climate change. The Danish Council of Ethics has recommended a tax on beef this year, coming to the conclusion that “climate change is an ethical problem.” Denmark views climate change as a direct threat to the country. Since it can’t rely on ethical consumers, it believes society must send a clear message regarding climate change through regulation. 

Optimum Tax Arrangement

The authors also took their study one step further, assessing the optimum tax arrangement for both emissions and health. After examining different tax regimes, the authors determined that the ideal policy would combine these taxes with subsidies for food, specifically healthy food such as fruits and vegetables. Moreover, maintaining a broad tax coverage–meaning many countries adopt such policies–would have the most beneficial effects.

This tax plan would reduce emissions by 1 billion tonnes a year, which is the total of the global aviation industry. The researchers were also surprised by the ability to cut emissions on such a massive level, especially when looking at the heavy impact of the dairy industry. Successful food tax policies take money generated through higher taxes and use the revenue for positive outcomes. Here, researchers advocate for utilizing tax revenue to ensure people can afford healthier diets.

Image Courtesy of Robert Couse-Baker : License (CC BY 2.0)

Many of the products that could have the greatest climate change impact also tend to be products that should be consumed in limited quantities. In the U.S., people on average consume three times the recommended amount of meat products, likely due to the relative ease of accessibility as well as a penchant for meat and dairy products. The most deadly and widespread diseases, such as heart disease, strokes, and cancer, may be curbed immensely by reducing meat and dairy consumption. Just last year, the World Health Organization classified processed meat as a carcinogen, while simultaneously classifying red meat as a probable carcinogen–specifically colorectal cancer. Thus, this new published research even noted that imposing an environmental impact tax on food products could end up saving more than half a million deaths each year in the U.S., Europe, Australia, and China. Saving significant money on health costs is a distinct possibility through these policies, as healthier diets would be both encouraged and subsidized.

Conclusion

Environmental impact taxes on food products are certainly controversial, just as the highly-debated soda taxes being implemented across the U.S. have been over the past few years. However, changing habits and behavior simply through marketing and advertisements can be nearly impossible to do. Public sensitivity regarding food choices has led to very few changes in how food is produced and consumed. Sometimes, financial incentives can be the ideal method for encouraging better and more responsible consumption.

As the global population increases, feeding the world will likely become a more daunting task. Currently, many food and tax policy issues are tied up in political knots, with governments hesitant to interfere in what is viewed as more “personal” choices. The powerful sway the food and agriculture lobbying industry has in shaping food policy cannot be ignored either. Additionally, this new research was not all positive, as there are potential negative impacts of adopting such tax regimes. Reductions in food availability and security is a possibility but could be mitigated by tailoring tax plans to each region of the globe. 

For now, environmental impact taxes on food may just be an idea rather than a reality. Such policies would impact more than just climate change, they would impact human health as well. Scientists and researchers across the globe seem to be coming to the same conclusion: to have a substantial impact in reversing climate change, dietary changes are essential to keep global warming below two degrees Celsius. This is a burgeoning field of research in both food and tax policy areas, but the current results are certainly compelling.

Nicole Zub

Nicole is a third-year law student at the University of Kentucky College of Law. She graduated in 2011 from Northeastern University with Bachelor’s in Environmental Science. When she isn’t imbibing copious amounts of caffeine, you can find her with her nose in a book or experimenting in the kitchen. Contact Nicole at Staff@LawStreetMedia.com.

The post Environmental Taxes: Can Food Taxes Combat Climate Change? appeared first on Law Street.

The U.S. government uses incentives in its tax policy to promote charitable giving. Most people are aware that they can deduct donations that they make to charitable institutions from their taxes. For small amounts, some people may not take advantage of this. Others might prefer to send the money that they would owe in taxes to a favorite charity, which is more in tune with their values. As a result, they try to diminish their tax burden as much as possible in favor of donating to charity. But very wealthy individuals can take it to a whole new level.

One strategy to reduce your tax burden that you can use is the creation of your own charitable trust. Charitable trusts allow the wealthy to preserve their asset value by not paying capital gains taxes on assets they sell through the trust, deducting the value of the gift that was made from their personal income tax, and taking advantage of other tax benefits designed to encourage charitable giving.

The charity gets a taste and the donor, who otherwise might not have given to charity at all, is incentivized to give. So is this a situation where greed is morally good?

Bet To Live Strategy

Take a look at this video about one of the most popular kinds of charitable trusts that you can create, the charitable remainder trust. Assuming of course that you have a million dollars. It gives a simple explanation of how the process works but, more importantly, a glimpse into why the process works.

As you saw in the video, the fact that the beneficiary is a charity can be irrelevant. In fact, the commenter goes out of his way to explain that you don’t actually need to care about being charitable in order to take advantage of this setup. What you should care about is whether you and your spouse have a long life expectancy. Because if so you then will be able to get the maximum amount of utility out of your trust.

This is why the charitable remainder trust, and other ways that the government incentivizes charitable giving by providing tax benefits to donors, is thought of as a good idea. Not because it rewards people for giving to charity but because it incentivizes people who otherwise wouldn’t into donating as well.

People who are motivated by their conscience to give money to charity–particularly those who have an issue of critical importance to them and a charity that focuses on that issue–are going to give money anyway. They have a built-in incentive to do so and may even give whether they could claim a tax benefit from it. But those only make up a portion of donors all charitable donors in the United States. The other portion includes those who are pushed to donate to charity because they want the financial benefits that donating provides. Of course, there is likely some overlap, those who get satisfaction or social benefits as well as a tax deduction for their actions, but there is a subset for whom it is all about the money. And if they weren’t benefitting themselves they wouldn’t be giving to charity.

By providing a financial motivation to donate we are capturing a donor class for charities that we otherwise would not have. What we want is to maximize the donor pool and by appealing both to greed and to altruism we can get the most donors possible. So what is the problem here?

Institutional Dynamics

One problem that exists with this setup is the amount of benefit that charities actually receive. Incentivizing the wealthy to give to charity through greed may be a great idea–but only if those charities actually get the money–or enough money to justify our privileging a charitable donation over what government would collect in the form of taxes. People who want to take advantage of the tax benefits that we use to encourage charitable giving will often set up a private foundation, which will, in turn, donate money to various charitable endeavors. But the IRS only requires the private foundation to spend 5 percent of its assets annually. Further, it doesn’t require that 5 percent to go to the actual mission of the charity they are donating to, it can go to things like administrative costs.

The individuals setting up these private foundations are receiving very generous benefits in the form of a tax deduction, but the charities that are supposed to ultimately benefit from these foundations may not be.

The amount that each institution needs to spend to be considered charitable–5 percent–is an arbitrary number that does not really represent what is the best amount for these institutions to spend. Especially when that percentage is so small. And while foundations could spend more than the required 5 percent, they rarely do.

It might be a good idea to treat different types of charitable giving in different ways. For example, a donor who is setting up his or her own private foundation versus one who is giving to an already established one. Allowing a donor who creates their own charity to label that activity as “charitable” when it only needs to spend 5 percent of the gift on that purpose may be unfair. Whereas we may want to allow academic institutions managing large endowments to be fiscally conservative to preserve their resources. It may make sense for us to treat different types of foundations differently and not have a blanket 5 percent expenditure rule in order to qualify. What should be prioritized is the benefit received by the recipients of the foundation, not the potential benefits to a donor.

We also might want to take a look at just how good a deal a charitable remainder trust is for the donor and how good a deal it is for the charity. It isn’t a bad idea to incentivize charitable giving by appealing to greed–in fact, it may be a very good idea–but we can probably negotiate a better deal for the charities. In both the remainder trust and the lead trust, the charities receive a benefit but the donors arguably benefit the most. For example, with a charitable remainder trust, you can sell an asset, such as a stock, through the trust to avoid a capital gains tax. And then you can deduct from your taxes the value of the asset that you gave to the charitable trust. Over the term of the trust (which can be in years or for your or someone else’s lifespan) you receive payments from those assets. Whatever is left at the end of the term goes to the charity but the donor, if they were fortunate to live for a long time after its creation, may have taken the bulk of those assets in annuities in addition to the tax benefits they received for forming the trust in the first place.

The lead trust operates in the reverse, giving the charity annuity payments and then the remainder of the assets to the creator of the trust (or their heirs). But it is still a good deal for the donor, especially those of extreme wealth. In some cases, a lead trust can result in a profit beyond the initial tax deduction that will eventually go to its recipient.

Another concern with this incentive is: what qualifies as a charity? The definition of charity can go beyond what we might think of as traditional charitable pursuits such as clothing the naked or feeding the hungry. There seems to be a wide range of what can be included as a charitable activity, including groups that act primarily as political special interest groups.

How the Wealthy Use Charitable Trusts

The Koch brothers’ charitable giving provides a prime example of how a charitable trust can be used to protect generational wealth. In this case, the trust established by Fred Koch, the father of Charles and David, was a charitable lead trust. A charitable lead trust allows a donor to give money to the beneficiary tax-free as long as the interest that accrues on the original amount is donated to charity for a period–in this case 20 years. This allows the heirs to keep more of the fortune left for them while at the same time ensuring a steady stream of income charity. For the Koch brothers, the charitable trust is not only protecting generational wealth, it is also used to promote a specific political ideology. A tax subsidy for this may go beyond what most Americans are willing to support, which is one reason why these methods may be worth revisiting.

Another example of estate planning to protect generational wealth can be found in the Walton family, the heirs to the Walmart empire. The Waltons have used a variety of trusts, including charitable trusts, to avoid paying estate taxes on their wealth, thus preserving it in the Walton family for future generations.

The trust most famously used by the Waltons is the so-called “Jackie O Trust,” which is a charitable lead trust. For a family with a lot of wealth and a lot of time this can be a useful tool. For example, Helen Walton, Sam Walton’s wife, set up four trusts in 2003. When she set them up the IRS set a rate of 3.6 percent, which is based on the interest rates for U.S. Treasury bonds at the time the trust is formed and how much the trust is likely to go to charity versus the heirs. But because interest rates on U.S. Treasury bonds are so low–and they have been for a while now–investments into these trusts easily beat those rates. In fact, the trusts returned 14 percent a year from 2007 to 2011. Which means that the Waltons pay 3.6 percent of this money in estate taxes, but the extra 10.4 percent that the trust earned went back into the pile and eventually go to the Walton family. They are making more money for their future estates than they are giving away.

Conclusion

Charitable trusts have a worthy goal–to promote charitable giving–and use an effective strategy to try to achieve it. It is the kind of appeal to self-interest that the original federalists would have been proud of. One that acknowledges the dearth of altruism in human nature and makes the best of it. But the balance of funds given to the charity versus the financial benefit to the donor may not be sufficient to justify the loss of tax income to the government. The regulations on this kind of giving could do more to ensure that charities get a higher percentage of the gift and that the gift is specifically used for tangible charitable activities, not for administrative costs and salaries. Appealing to a wealthy family’s self-interest in order to promote charitable giving is smart. But it can and should be a better deal for charities than it is now to justify foregone tax revenue.

These regulations also could do more to define what qualifies as a charity in the first place. Political discourse is a worthy goal in and of itself. But it may not be one that Americans want their government to promote through a tax incentive. Or, if we decide it is, then that should be separate from the promotion of charitable contributions. We can be careful about how money that we allow to go to charity rather than to government projects is being spent by taking another look at what we define as charitable. The rules for what is charitable are murky–donations to a 501(c)3 that engages in “education” are deductible, while a donation to a 501(c)4 that engages in politics is not, but the line between the two is not clearly defined. The requirements for the kinds of donations that we want to allow exemptions for should be clearer and more stringent.

If we are going to siphon tax dollars away from important government functions, through charitable tax deductions, the charities that are eligible should be ones that do charitable work that is similar to those goals. That way individuals who don’t want their taxes to support policy X but have no problem with policy Y can give to a charity that does something similar to policy Y. They are still incentivized to give but lost government revenue should not be done in vain.

Resources

Fidelity: Charitable Giving That Gives Back

Salon: 10 Tax Dodges That Help The Rich Get Richer

Mother Jones: Exposed: The Dark Money ATM of The Conservative Movement

Daily Kos: Jane Mayer’s “Dark Money” Exposes Charles Koch’s Campus Lobbying Scheme

Goodreads: Dark Money: The Hidden History of the Billionaires Behind The Rise of the Radical Right

Money Crashers: What Is A Charitable Remainder Trust- Definition, Rules & Taxation

Inside Philanthropy: Dept. of Murky Money: What the Heck Is a Charitable Trust?

Bloomberg: How The Waltons Maintain Their Billionaire Fortune: Taxes

The New York Times: Minding Your Business: The Jackie Onassis Trust, and a Variation On It

Daily Kos: 501(c)(3)s, 501(c)(4), and the Rest. A Primer

The Sunlight Foundation: The Difference Between Super PACs and Dark Money Groups

The Washington Post: How Is The IRS Supposed to Vet 501(c)(4) Groups Anyway?

Grantspace: What is a Foundation?

Mary Kate Leahy

Mary Kate Leahy (@marykate_leahy) has a J.D. from William and Mary and a Bachelor’s in Political Science from Manhattanville College. She is also a proud graduate of Woodlands Academy of the Sacred Heart. She enjoys spending her time with her kuvasz, Finn, and tackling a never-ending list of projects. Contact Mary Kate at staff@LawStreetMedia.com

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