Wednesday, May 25, 2011

A National Endowment to Eliminate the Debt

I wonder if we could make a dent in the national debt by approaching it the same way that most non-profits build their endowments.

Last month, while preparing to lead a fund-raising workshop for the Indiana Historical Society, I brushed up on the professional literature by reading the annual Giving USA report on philanthropy in the US.

Other than the fact that the recent recession has caused a tiny decrease in total giving for the first time since we started keeping track (back in the early 1950s), overall the basic facts about philanthropy have remained remarkably unchanged.

Total charitable giving has hovered for a few years around $300 billion per year – about 2% of the total $14 trillion US economy. Charitable giving has grown every year but one for over fifty years, but as a share of GDP, it’s held steady at about 2%.

The share of that $300 billion given by corporations has fallen just slightly to 4%. The share given by private foundations such as Lilly Endowment has grown slightly to 13%. The share given by individuals in current-year cash, checks, and gifts of stock and other property has held steady at about 75%. And the share given by individuals in one-time estate gifts – bequests left to charities in people’s wills – has held steady at about 8%.

(As my colleague Jim Gillespie points out here, dead people give more money than corporations. The line always gets a laugh, but the point is that too many non-profits put too much effort into raising money from the apparent deep pockets of big companies, while the real money comes from individuals [who don’t have to answer to boards or stockholders].)

Another key point that Giving USA always makes is that intergenerational transfer of wealth is an enormous untapped resource … over the next 45 years, roughly $41 trillion dollars will pass from one generation to the next. It’s going to go three places – to inheritances to children and other family members; to estate taxes (in the case of estates worth $5 million or more); and to charitable bequests to non-profits or, in some cases, public entities like schools and libraries.

The purpose of this last point is to remind organizations that their long-term financial health depends on becoming one of the charities that their best donors remember in their wills. Because in most cases, that’s how an organization builds its endowment – not by receiving huge cash contributions, and not by running and “banking” operating surpluses.

And the first several times I heard (and then shared) that figure -- $41 trillion – it just seemed too huge to contemplate. I couldn’t intuitively calculate how large it was. It might as well have been “infinity” – the point was, the number was astronomical, and we could transform our organizations and change the world by tapping into a tiny tiny fraction of it.

Well, thanks to the economic news of the last three years, the number is no longer too large for me to grasp. I can grasp it now. $41 trillion is about three times the annual GDP of the United States. It’s also just about three times the accumulated national debt.

Do you see where I’m going? I always advise non-profit organizations to see bequests as a dedicated revenue stream for building their endowment. Unless a donor otherwise specifies (i.e, “I’m leaving my church $100,000 for new stained glass windows”), a charity should not spend a bequest; or at least it should only spend it on one-time capital improvements. It should never treat it as annual operating revenue, because the annual operating budget can’t become dependent on gifts that are effectively one-time gifts. And my recommendation is always to adopt a policy of putting “undesignated” bequests into an endowment – and encouraging donors to include the organization in their will with that understanding.

Right now, the federal government is spending $1.4 trillion more this year than it is taking in in tax revenues of all kinds. It “sort of” keeps Social Security and Medicare taxes discreet from other general individual and corporate income taxes, at least on paper. But it doesn’t treat inheritance taxes any differently from income taxes or capital gains taxes or other general revenues. And since it only taxes that portion of an estate that is in excess of five million dollars, it is a) only taxing the top 1-2% of us, and b) failing to treat those funds as a non-renewable, one-time transaction.

The United States needs a credible plan for reducing a debt that is now larger than the entire economy, and that has tripled in the last ten years. It’s been this large, as a share of the economy, once before – at the end of World War II, when we had quite reasonably mortgaged everything we had to defeat the Nazis and, frankly, save democracy. That debt wasn’t fatal, but we didn’t whittle it down as a share of the economy) overnight. It took 35 years to get the relative debt down to the low point that it reached in 1981, when it was less than a quarter of the economy.

So here’s a simple plan. Create a dedicated revenue stream for reducing the debt – one-time, non-renewable estate taxes. Pay for the annual government spending that we want now with renewable, current-year taxes. Over the next 45 years, we can retire the $14 trillion national debt by collecting one-third of the $41 trillion in intergenerational wealth transfer with a universal inheritance tax.

I’ll wait now for the screaming and swearing to die down. (Six weeks pass.) Okay, hear me out. First of all, I understand that paying estate taxes can cripple the ability of a family to keep a family business or a large family farm intact. Of course, it currently only affects estates worth more than $5 million, many of which have lots of other liquid assets in addition to the farm or factory. And I heard from an estate planner at last fall’s Indiana Rural Summit that 70% of the inheritors of family farms and businesses cash out within five years anyway. So, if that’s the case, it might be possible to exempt long-standing family farms and businesses (those that weren’t bought as a last-minute tax dodge) from the inheritance tax. Those next-generation owners who want out of the family business a couple years after dad is gone can simply pay capital gains taxes to the debt retirement fund at the time they sell out to MegaCorp. Those that do, in fact, maintain a thriving local business that creates and maintains local employment probably deserve the tax "break."

Meanwhile, I don’t think its good for the body politic to have a tax structure that takes large chunks from a very few taxpayers, and none at all from not only average taxpayers, but from even quite wealthy taxpayers who’s parents die with not quite $5,000,000 in the bank.

Similarly, I don’t think it’s healthy that we have a structure that allows the claim to be made (technically correctly) that 47% of taxpayers pay no federal income tax (after all the deductions and earned income credits) – even if many of those taxpayers do in fact pay more of their total income in other taxes than some of the rest of us.

These things just add fuel to the fire of politicians and talk-show hosts who like to bleat about class warfare.

By the same token, why should an average taxpayer, or a well-above-average taxpayer, stand to receive $50,000 or $500,000 or exactly $5,000,000 when a parent dies – and not owe a penny in taxes?

My wife and I might end up in one of those categories – depending on whether or not end-of-life care absorbs every penny that both of our mothers have saved in a lifetime. Both our mothers fret about outliving their savings and becoming a burden to their families and to society. Unfortunately it’s almost impossible to be prudent and virtuous enough to guarantee that that won’t happen.

Because of the realities of health-care costs, my wife and I are not planning on an inheritance. If we get one, why should we keep every penny of it? We didn’t earn it; our parents did.

So what argument is left against a universal inheritance tax? Yes, I know. Who among us trusts the politicians who wrestle for control of the federal government to use these dollars to reduce the debt, instead of just using them to subsidize current-year operations in a budget that remains irrationally out of balance? Not me.

So perhaps the solution is not to TAX the $41 trillion dollar transfer of intergenerational wealth that current voters will leave to our children. Perhaps we should endeavor to persuade all of us to voluntarily leave a third of our estates to a private foundation that exists to pay down the crushing debt that we as an electorate have allowed to be heaped upon our innocent children. (But only as long as those politicians maintain a balanced annual operating budget.) Let us establish the National Endowment to Eliminate the Debt.

Or perhaps the operative verb is “Retire.” I just think we’ll get more takers if the organization is called NEED instead of NERD.

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