Even If Taxes On Charitable Gifts Increase, Don't Expect Philanthropy To Wither Away

It's possible to imagine that such increased taxes on charitable gifts would have a dampening effect on philanthropy. But people are used to making lemonade from the sour lemons of the tax code.

Lately there has been a great deal of talk in Washington about levying more and higher taxes on the rich—including new or increased taxes on charitable gifts and assets.

That possibility has been greeted as sour lemons by many. It's certainly possible to imagine, in the abstract, a tax that would have a dampening effect on philanthropy. But, as surprising as it might be to hear from someone who is in the business of helping philanthropists achieve their charitable giving goals—and given that some of the most active supporters of increased net taxation on upper income individuals are among the nation's wealthiest individuals and families—I don't think a nightmare scenario will unfold, even if new taxes are levied.

I do believe that significant changes in the U.S. tax structure are inevitable. Philanthropists will feel the pinch. But all evidence suggests they will continue their giving activities as a means not only of doing good but of taking and maintaining control over all of their money and assets, i.e., rather than merely allowing government to distribute portions of their wealth through the tax and legislative structures, leaving personal control only over their after-tax wealth and resources.

Measurable trends among small and midsize private foundations support the idea that America's philanthropists are unswervingly committed to charitable giving—both current and deferred—and significantly to grant-making from private foundations, even under the most adverse economic circumstances, including when their own assets are diminished. In fact, charitable distributions from foundations with assets ranging from $250,000 to $50 million have increased during the current recession by 15% in 2009 and 9% in 2010—this even as large institutional foundations retrenched.

It can be misleading to attempt to pigeonhole American philanthropists with a single catchphrase. There is no "one size fits all" profile. Nevertheless, a growing number of individuals and families who establish private foundations may be fairly characterized as "entrepreneurial." They tend to be first-generation multimillionaires who have done well in business by being singularly focused on a specific product or service or an innovative approach to products and services in the marketplace. Now they want to apply that same talent to philanthropy, with the goal of making a difference in a field they have targeted. This is the group of philanthropists that falls into the small and midsize private foundation category.

So, to cite just a few examples:  If you want to help tornado victims in Joplin, Missouri, advocate for the orphaned children of Korean mothers, support leading-edge experiments in cancer research, develop mobile applications to help autistic children communicate, provide loans to rebuild rural churches, or pool funds to finance documentary films focused on social change, private foundations are the way to go.

Levying or increasing taxes on charitable giving is not likely to alter that fact.

No one knows what a new tax regime might finally look like. But change is surely coming. We can't adequately face our challenges as a nation and maintain our national way of life without fixing the tax system, even if we manage to also reduce government spending and grow jobs. It's just not possible that the tax burden on wealthy individuals and families will stay as it is. It certainly won't decrease.

The increase likely will come in different ways: a change in the marginal income tax rate; the closing of loopholes; the elimination or reduction of deductions for charitable giving. One way or another, donors are going to see more taxes and therefore, without strategic planning and financial efficiencies gained through chartiable structures like private foundations, fewer net assets will be available for charitable purposes. If the changes do include a direct tax on charitable gifts or assets, philanthropists in the small to midsize foundation category will simply adapt as they have been already doing. If the financial benefit of $1.00 of a charitable contribution is cut to 50 cents via a new tax, philanthropists will find additional ways to leverage their assets for charitable goals or, if necessary, give $2.00 to get the same financial benefit. That is the nature of American philanthropists.

Philanthropists will also view it as in their interest to find those efficiencies and invest even greater assets in charitable goals, rather than to sit back and see if and how the government or others will address the short- and long-terms issues in our communities. A thinking donor will always believe and know that she can do a better job of managing her social, intellectual, and philanthropic capital than can the government or others. This is particularly true of those philanthropists with successful entrepreneurial experience.

How realistic is it that philanthropists will pump up their overall donations to make up for the money needed by Uncle Sam? Among the small to midsize private charitable foundations that I help manage, I think it is highly likely that donors will want to make up the difference—at least in part. Companies in the business of helping donors manage their wealth have got to take this all into account. We need to be smarter advisors. We also have to be smarter as individuals. We can't continue to have the quality of life we've come to expect in this country for less money. It just doesn't work that way. So we're all going to have to pay more to get out of the hole we have dug for ourselves. And we're all going to have to think, advise, and act smarter to get as much as we want from all our assets throughout our lives.

Make no mistake: There will be much wailing and gnashing of teeth about the negative impact of tax changes on philanthropy. That has always been the case—with increased capital gains tax rates, with increases in marginal income tax rates, with changes in the transfer tax structure and rates. All such changes, whenever they have occurred, precipitate laments for the lost giving that will occur. It never does occur. Within a very short time after the initial shock of tax changes, financial advisors, nonprofit fundraisers, and other managers will figure it out and show donors how to adjust and adapt and carry on in their work. That's what you call turning lemons into lemonade.

Foundation Source Philanthropic Services Inc.  •  Fairfield, Conn.  •  www.foundationsource.com

[Image: Flickr user pawasbuddy]

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