The OCGFC utilize foundations to not pay taxes and drape their fortunes in philanthropy, but essentially they’re coercively used to change society and take over other organizations by buying board seats to make sure their money is spent “responsibly”. To that end there seems to be some changes to tax rates under consideration, but I’d bet there is a built in workaround for the billionaire foundations, and this is a way to limit the up and comers who threaten their control. But notice the current tax rate.
The Tax Reform Act of 1969 established the current rules for private foundations. It affirms their right to exist in perpetuity while requiring them to grant out a fixed percentage of their endowments each year to support charitable activities (initially six percent, reduced in 1976 to five percent). The Act also beefed up transparency standards and set a flat excise tax on the investment income foundations earn through their endowments. The tax rate has long remained in the low single digits; currently it is 1.39 percent.
https://www.aei.org/society-and-culture/the-power-to–tax-foundations-is-the-power-to-destroy-them/
By Daniel Stid
Tucked away in the tax legislation making its way through Congress is an obscure provision that could lead to profound changes in civil society—and not for the better. The House Republicans’ bill would sharply increase the excise taxes paid by the foundations that help underwrite America’s charitable sector. The Senate should reconsider this proposal.
Republicans see foundations—especially the largest ones that would bear the brunt of the new taxes—as purveyors of the progressivism they want to squelch. In the case of several prominent institutions, they are not wrong in their diagnosis.
However, the partisan animus behind the House GOP’s remedy will throw the philanthropic baby out with the woke bathwater. Moreover, imposing taxes because of disdain for the views of those who will pay them runs counter to our system of ordered liberty.
The Tax Reform Act of 1969 established the current rules for private foundations. It affirms their right to exist in perpetuity while requiring them to grant out a fixed percentage of their endowments each year to support charitable activities (initially six percent, reduced in 1976 to five percent). The Act also beefed up transparency standards and set a flat excise tax on the investment income foundations earn through their endowments. The tax rate has long remained in the low single digits; currently it is 1.39 percent.
The House bill does not change this rate for smaller foundations. For those with assets from $50 million to less than $250 million, the rate will double, to 2.78 percent. For foundations with endowments from $250 million to less than $5 billion, the excise tax will rise to five percent. Then, for the small subset holding $5 billion or more, the excise tax spikes up to 10 percent.
The excise tax debate has flagged many problems but not yet gotten to the core issue. Its opponents are certainly correct in pointing out that it will reduce charitable giving. Even under the current low and flat tax rate, funders are hard pressed to maintain their charitable spending power given the five percent payout requirement and the costs of inflation. The increased excise taxes will raise this hurdle even higher, leading to shrinking endowments and grantmaking budgets.
Another predictable, albeit unintended outcome of the proposed excise tax will be to channel more philanthropy into LLCs and donor advised funds that—unlike foundations—have no payout requirements, allow for much less transparency, and are not subject to the excise tax. This would not be the first time that a hasty bid by Congress to tax activities it dislikes pushes them further out of reach.
Given these substitution effects, it’s not clear the proposed tax hike can generate the $16 billion in tax revenue over the next decade the Joint Tax Committee is projecting. But given the House bill would blow open a $3 trillion hole in the deficit over this period, its supporters should spare us the claim that the excise tax increase is driven by fiscal prudence and probity.
The real driver and core issue is that the new tax scheme enables the MAGA movement to punish its perceived enemies while insulating its friends. Of the two dozen foundations that would pay the top rate of 10 percent, not even a handful harbor worldviews that are not implicitly liberal or, in the case of the Ford and Open Society foundations, explicitly progressive.
Conservative, libertarian, and the growing set of MAGA-friendly philanthropists typically avoid setting up large, in-perpetuity foundations in their determination to safeguard their donors’ intent. As a result, most funders on the right would either be flying below the radar of the elevated excise tax rates or at its lower altitudes.
Republicans backing the tax hike may think they have an elegant strategy to punish left-leaning philanthropy, but it is too clever by half. Many conservative foundations with mid-size endowments will still suffer the bite of these new taxes and have less money to grant as a result. And the next Democratic President and Congress will have every incentive to retaliate against their perceived enemies in the foundation world. It will be tit for tat.
The regulatory regime for the charitable sector that Congress established back in 1969 has exceeded its half-life and stands in growing need of an overhaul. Lawmakers should deliberate and decide on how best to accomplish this in a holistic way. Until then, an ill-considered tax hike on foundations will do more harm than good.
As John Marshall observed in McCulloch v. Maryland, “the power to tax involves the power to destroy.” Congress must therefore wield it wisely. The House bill puts foundations across the political spectrum—and the pluralistic charitable sector they support—on a slippery slope. Nothing good lies at the bottom of it.