A wealth tax will hurt charities, too

America’s corporate economy has long been divided between a taxed, for-profit sector and a non-taxed, not-for-profit sector. This division has significant implications for tax policy: To wit, if the wealth gained from for-profits is penalised, the non-profit sector will also suffer.
Consider the wealth taxes that have been proposed by Elizabeth Warren and Bernie Sanders. Even an apparently modest annual wealth tax of 2% could, applied cumulatively, erode most of the value of an asset over a few decades. In response, billionaires won’t be so keen to hold those assets in their personal portfolios; they may decide to place more of them in their personal foundations and in donor trusts.
If those institutions are taxed as well, billionaires can simply give more money to non-profits. Either way, significantly more resources will end up in non-profits. The size of the non-profit sector will dramatically increase.
So far, so good, right? Not necessarily. Many non-profits are inefficient, have poorly defined goals and lack accountability. In this new world, they also would be spending more time and money chasing after donor dollars.
Non-profit institutions already receive significant subsidies through the tax system: Not only are donations tax-deductible for many donors, but non-profits do not typically pay tax on net income or property taxes on land. Applying confiscatory tax rates to capital asset values would make the value of that subsidy far greater.
As someone who has worked his entire life in the non-profit sector, I appreciate the tax deductibility of donations. But I don’t think the subsidy should be extended beyond that.
The effects of pushing wealth out of the non-profit sector would be far-ranging. Wealthy donors might be more likely to pressure non-profits for luxury consumption experiences, for example. Many non-profits sponsor cruises to Alaska or the Caribbean for their donors, as a method of fundraising and also for building good will and networking.
In essence, the non-profits would be used to re-create private consumption experiences, but in non-taxable form. This is not a healthy scenario for America’s non-profit institutions.
One response, of course, could be for the government to regulate non-profit institutions more stringently to limit such abuses. Maybe that would happen, but such regulation would inevitably become absurdly complex, if not downright absurd.
The US has created the most dynamic and effective non-profit sector in the world. It rests on a delicate balance of private support and some indirect (not too much) government subsidy. America interferes with that balance at its peril.

—Bloomberg

Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include “The Complacent Class: The Self-Defeating Quest for the American Dream.”