Carolina Journal associate editor Mitch Kokai recently discussed the estate tax with Rob Schofield, director of public policy and government relations at the North Carolina Center for Nonprofits, and Joe Coletti, fiscal policy analyst for the John Locke Foundation. The interview also aired on Carolina Journal Radio. (Go to http://carolinajournal.com/cjradio/ to find a station near you or to learn about the weekly CJ Radio podcast.)

Kokai: First of all, Rob, you recently have put together an opinion piece on this topic of just what impact it would be on charitable giving and nonprofits if the estate tax were abolished. Share with us what your concerns are.

Schofield: Well, the estate tax provides a very healthy incentive for wealthy Americans or their estates to donate money to charity. Nonprofits have come to rely upon this money over the years, and it’s a tremendous amount of money. There have been some analyses that estimate that we are talking about billions and billions of dollars in lost revenues to nonprofits throughout the country if, in fact, we were to repeal the estate tax. And this would have a profoundly negative impact on our society because we have come to rely upon those nonprofits to provide all kinds of essential services. None of us could even imagine, I think, what our communities would look like if we didn’t have a lot of these nonprofits providing core services, innovating, coming up with creative ways to solve societal problems. And so the bottom line is that all of us would take an enormous hit, because every nonprofit would be on the phone, asking you for contributions to try and make up this lost revenue. We’d lose lots of nonprofits. We’d lose lots of essential services, and we would just have a much less healthy society. And that’s just one of the negative byproducts of repealing the estate tax.

Kokai: Is there a sense, any type of study that’s been done, of just what sort of dollar impact there would be or is this basically anecdotal thought?

Schofield: I think I quoted the general amount — or no, it was the Congressional Budget Office, actually. And they looked at what the effect would have been in 2000 if we had repealed the estate tax, and they put the estimate anywhere between 13 and 25 billion dollars a year, which is effectively even more than corporations already give the nonprofits. So, we’re talking about an enormous hit. It would be truly a devastating blow to nonprofits throughout the country if we were to take that step.

Kokai: We’re going to turn now to Joe Coletti of the John Locke Foundation. One of the policies of fiscal conservatives is getting rid of this estate tax. What about the concerns that Rob mentions?

Coletti: Well, the first thing about nonprofits is that, obviously, we like nonprofits. We are a nonprofit ourselves. We’d like to see more work in society being done by nonprofits instead of the government. They’re a great third source — third sector of the economy — and very important to provide all of those services. And, as Rob said, they are innovative more than the government would be. On the other hand, the amount that the estate tax contributes contributes to nonprofits is only about 10 percent of what nonprofits earn during a year. The estimate that Rob gave of about 13 billion dollars in 2000 — that was about the same amount that nonprofit donations went up from the previous year. And it’s an expensive way to bring about nonprofit donations. The estate tax rate is 46 percent. You have a lot of efforts to avoid it. A lot of estate planning — huge industries that go into it. And according to Martin Feldstein, looking at the impact on the government, the amount that’s lost in income tax because the estate tax is greater than the amount that the estate tax actually earns. So, when you are looking at government revenues, which is what taxes should do — taxes should raise money for the government — they shouldn’t try to influence other aspects of society. The estate tax is that negative on government revenues, and there are much better ways within the tax policy if you think tax policy should influence society — and it should influence nonprofit giving to actually do that — than having this extremely expensive nonproductive tax.

Schofield: Well, I’m not sure that I would agree with you that the notion that the tax system shouldn’t be used for other purposes other than just raising revenue. I think it’s an accepted premise of American government that the tax code is used for a whole variety of good purposes. Sometimes it’s used for some bad purposes. But in general, I think this is a good one. It seems to me that the bottom line with the estate tax is that it’s an enormously effective tax. It’s a tax that, here we are in a time of rampant inequality in our country, a time when our budget is busted at the federal level, and the most illogical thing to do would be to repeal a tax that taxes those problems, that raises tremendous amounts of money. The 46 percent rate, of course, isn’t really the effective rate because you’ve got a two million dollar exemption. That exemption is going to go up even more. So, we are talking about a few thousand estates of the wealthiest people in the country who have an opportunity to pay back to society for giving them a chance to succeed and be so successful. That’s why people like Bill Gates Senior support the estate tax. And so it’s just an — it just seems to me the most illogical step we could take at a time of budget deficits and at a time of rampant inequality to repeal what some call the Paris Hilton tax.

Coletti: Well, the effect on the government is actually really small. The estate tax at the national level raises 1.2 percent of the government’s revenues. In North Carolina it raises less than 1 percent; it’s about 0.8 percent over the last few years that it raises. So, we are not talking about a huge impact on government revenues if you get rid of this thing. And if you’re complaining about the deficit, then what we need to do is worry about how much money is being spent. And, again, if we have deficits, we are obviously spending too much money. Everybody else has to deal with that. And when dealing with Warren Buffet, Bill Gates, the rest of them, they are able to set up charities and do all of these things with the money that they have, so that they can avoid the estate tax. Again, it’s the people who have a lot of money who are able to avoid the estate tax. It’s the people who don’t have that kind of ability to access lawyers and to create charities and to do those other things that don’t have it. And so we’re actually talking about the super rich making it harder on the relatively well-off.

Kokai: Let’s throw one more piece into this mix now. Obviously, a difference of opinion on both sides of this argument. But what about some people who don’t like the estate tax, who might say, “Well, isn’t the argument that you are putting forward, Rob, that these groups would not be able to raise this money by themselves are just relying on the tax code to help them get this money? Is that a valid concern?”

Schofield: Well, I do, as I said earlier, I think we make lots of decisions with government and with the tax code that have multiple effects. And this is one beneficial, extremely beneficial, effect of having the estate tax. You know, I suppose in a perfect world it would be lovely if everybody that was fabulously wealthy would simply give of their income so that they were — so that everybody else was taken care of. But of course we don’t live in a society like that. We live in a society where we have to make decisions collectively. And so, what can I say? I just think that it’s just something we’ve always done with the tax code. It makes sense. It’s worked very well. And it would just be a mistake to take that step away from it.

Coletti: Well, in addition to all of the costs that people do to avoid the tax, you have all of the cost that happen when you impose the tax, that businesses close so that their children can pay the tax, and that people stop investing and saving. And really, what you want to do within a society is you want to increase saving and investment. That increases the ability of everybody to earn income and to contribute that income to charities and nonprofits.