The impact of private wealth on public policy through tax-exempt organizations has garnered much attention of late, with recent scandals involving the Sacklers, Jeffrey Epstein, and a number of prestigious universities. Recent critiques, however, fail to emphasize sufficiently the role of wealth in campaign finance. Citizens United and the rise, in its wake, of Super PACS able to solicit and spend unlimited amounts make such consideration crucial. Today more than ever, political power of the wealthy means that government spending, like charitable spending, is likely to reflect the interests of the wealthy.
Current proposals for a wealth tax also need to confront this issue. On Sept. 5, as part of the Brookings Papers on Economic Activity, Emmanuel Saez and Gabriel Zucman presented an important new paper on progressive wealth taxation. The Saez-Zucman paper describes a wealth tax as a means of reducing wealth concentration needed because of such concentration’s effect on democratic institutions and policy-making. (The paper notes that political contributions are extremely concentrated, with 1.01 percent of the population accounting for over a quarter of all such contributions.) According to those present, discussion at the session included whether a wealth tax would reduce billionaires’ political influence.
To prevent abuses of a wealth tax, the Saez-Zucman paper proposes that donor advised funds — accounts at public charities for which donors can make recommendations as to the distribution or investment of amounts in the accounts — and funds in private foundations controlled by funders “should be subject to the wealth tax until the time such funds have been spent or moved fully out of the control of the donor.” (The paper leaves to another day the question about how to treat private foundations no longer controlled by the original funder and how to avoid gaming of “control.”)
The paper, however, does not discuss other organizations exempt under section 501(c). Most importantly, it neglects section 501(c)(4) social welfare organizations. For the very wealthy, the charitable contribution deduction offers little if any benefit, because of limits on the deduction related to adjusted gross income. These donors may choose instead to conduct charitable activities through section 501(c)(4) organizations, even though there is no income tax deduction for contributions to them — such organizations, as is widely known, can engage in unlimited lobbying and considerable electioneering. (To the extent section 501(c)(4) organizations engage in electioneering, they owe tax on the lesser of their investment income or the amount spent in electioneering.) Wealthy donors could well control such section 501(c)(4) organizations. Thus, under the reasoning of the paper, the wealth tax should apply to these and possibly other 501(c) entities as well.
Designing a wealth tax, moreover, requires us to consider the utility of other political spending. Under current tax law, contributions to tax-exempt political organizations as defined in section 527 receive the same inconsistent treatment as contributions to section 501(c)(4) organizations: subject to income tax because not deductible and subject to estate tax, but not subject to gift tax. In addition, political organizations pay tax on any investment income. That is, those designing a fully articulated wealth tax must decide whether it should reach, in certain configurations of control, Super PACS, section 527 organizations and possibly even candidate campaign committees. In short, section 501(c)(3) organizations are not the only category of exempt organizations where control by the wealthy can matter and can influence policy.
Some assert that money is not the problem with the our political system; others take the position that a better approach than applying the wealth tax would be a full-scale revision of the tax and campaign finance law that currently regulates tax-exempt wealth controlled by identifiable individuals. But if we pursue a wealth tax such as that proposed by Saez and Zucman — who have advised candidate Elizabeth WarrenElizabeth WarrenSinema's office outlines opposition to tax rate hikes The CFPB's data overreach hurts the businesses it claims to help Runaway higher ed spending gains little except endless student debt MORE on the design of a wealth tax — we need to consider its possible application to and implications for tax-exempt organizations beyond section 501(c)(3) organizations, including political organizations.
Ellen P. Aprill is the John E. Anderson Chair in Tax Law at LMU Loyola Law School in Los Angeles, where she founded the Western Conference on Tax Exempt Organizations.