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Reflections
on the Estate Tax and Philanthropy:
An Interview
With William Gates Sr.
by Jim Grote
Reprinted from the 2001 issue of Planned
Giving Today. Copyright © 2001. All rights reserved.
William
Gates Sr. is chairman and CEO of the Bill and Melinda Gates
Foundation, the
largest foundation in the world. Following three years of Army service in
World War II, Mr. Gates obtained his bachelor’s and law degrees from the
University of Washington (where he now sits on the Board of Regents). He is
retired from Preston Gates &
Ellis, one of Seattle’s leading law
firms. Mr. Gates has served as trustee, officer and volunteer for more than
two dozen Northwest organizations and is presently a member of the board of
directors of the United Way of America.
Recently
he helped launch the “Call to Preserve the Estate Tax,” a petition
sponsored by Responsible Wealth (a project of United for a Fair Economy).
Responsible Wealth (www.responsiblewealth.org)
brings the voices of people in the top 5 percent of income and/or wealth in
the United States together to advocate for shared prosperity and more
progressive taxes. To date, more than 1,000 wealthy individuals who will owe
estate taxes have signed this petition along with more than 17,000
individuals who will not owe estate taxes.
The
interview was conducted by Jim Grote, a member of PGT's Editorial
Advisory Board.
Grote:
What effect do you think the recent terrorist attack on the United States
will have on philanthropy in this country?
Gates:
Certainly the philanthropic
response to the attack has been huge and gratifying. It seems certain that,
by and large, it will be an "add-on" to the general philanthropic
giving in the country this year. On the other hand, some of the traditional
and regular philanthropic efforts may suffer some discount from dollars
going into the September 11 Fund. It's difficult, if not impossible, to
evaluate consequences like this at such an early date.
Grote:
How
does the foundation plan to respond to this crisis?
Gates: Thus far we have given three $1 million gifts to three different
funds.
Grote:
I’ve been reviewing some of your articles on the Responsible Wealth
Web site (www.responsiblewealth.org).
In one particular article you state that, “Ever since I heard that someone
was trying to repeal the estate tax, I’ve been angry.” Your feelings
have also been revealed in the petition you have been circulating among
wealthy Americans. What is the current status of this initiative?
Gates:
We’re in recess at the moment; everybody is trying to figure out what
happens next. Of course, we now have this interceding situation of the
diminished tax collections and the diminished economic forecast. All that
stuff is kind of on center stage at the moment. Those of us with concerns
specifically about the estate tax are gathering our resources and trying to
figure out what to do next and when.
Grote:
I take it you assume that the vanishing surplus is a sign that it was unwise
to move toward cutting the estate tax?
Gates:
That’s true, although the point I am most deeply concerned about is simply
the repeal of the estate tax. I don’t particularly care to get into a
discussion about whether the income tax modifications were or were not a
wise thing in light of what’s happened, or under any circumstances. The
income tax part of it is not what concerns me. My conviction has to do with
what seems to me the importance and rectitude of having a substantial estate
tax as a factor in our country’s revenues.
Grote:
Would you speak more about that?
Gates:
There is no argument about the fact that the country needs to impose taxes
because it has to have revenue. I’m not in a discussion about how large
those revenues should be. I’m in a discussion about what the ingredients
of the revenue should be. I assume that there is some amount of tax that our
government is going to collect from us all each year, as regular as the sun
rises, and that part of that should be a tax on large estates.
Grote:
There will always be many types of taxes and in your mind the estate tax is
a fairer type of tax than certain other kinds of tax?
Gates:
Yes, and there’s an inter-relationship, obviously. Whatever is not
generated by an estate tax is going to be generated by some other kind of
tax. On a comparative basis, it seems to me it would be very unfortunate to
increase, for example, income taxes or employment taxes, in order to make up
for a shortfall that occurs from repealing the estate tax.
Grote:
“Death to the death tax” has become a kind of rallying cry for minority
business and family farmers. Yet only a very small percentage of all estates
are taxed. How do you explain this kind of populist outrage against a tax
that affects so few people?
Gates:
Well, I think the principal ingredient of that result is an enormously
clever, long-term and persistent effort by those on the other side of this
issue to create a public attitude. I credit it to an unbelievably successful
public relations effort. The newspaper people have been highly organized,
using the expression “death tax" and showing the poster children --
farmers or small business persons -- having lost a business or not being
able to pass it along to their families because of the estate tax. The
continuous pounding and presentation of those pieces of the case have been
very effective. Unfortunately, those of us who feel otherwise never got on
the field. I mean, the opposition was running up and down the field making
touchdowns at will because there wasn’t anybody doing any tackling on the
other side.
Grote:
Besides the petition that Responsible
Wealth is backing, are there other public relation efforts that are
being planned to deal with this issue?
Gates:
Well, I certainly think that there had better be. I mean, I’m not certain
just what the game is going to be, but I think it is true that there is
enough weight on the “don’t repeal” side of this argument that the
measures that have been used by the repeal folks will be met. We’re not
going to leave the field to them alone.
Grote:
Critics of the estate tax argue that it undermines productivity by
discouraging savings and increasing the cost of savings relative to
consumption. How would you respond to that kind of argument?
Gates:
I don’t think it’s true. I don’t think people who have to pay estate
taxes save money because of the opportunity to pass it along to their heirs.
Suppose there’s a 50 percent tax. Some wealthy guy gets up in the morning
and says, “Well, some day the government is going to take away half of
what I leave, so I don’t think I’ll work so hard today.” Now what kind
of nonsense is that? They’ll still be getting out of bed, putting on their
shoes and going to work. Even if there’s a 50 percent estate tax, I just
don’t believe that’s the way human beings work in this country.
Grote:
In the recent presidential campaign, George Bush accused Al Gore of
believing that “all the money” belongs to the government and the
government lets the citizens keep some of it. Bush maintains that “all the
money” belongs to the people and taxation allows the government to keep
some of it. Whose money is it?
Gates:
I wouldn’t approach this thing in terms of ownership. I don’t have any
argument with people saying, “The instant before my death I own it all.”
I don’t suggest for a moment that the U.S. government owns any part of it.
That’s true on every April 15 as well. When I get up the morning of April
15, I own it all and by that afternoon I don’t own so much any more
(laughter) because I sent a check to the Internal Revenue Service. All of us
have debts. I think this characterization fits. It is not a matter of the
government “proving” things; it is a matter of appropriate indebtedness
for benefits received.
Grote:
So, your argument, if I understand it, is not the quantity of taxation,
whether there should be more or less. But if there is taxation, the estate
tax is one of the fairer ways to tax people.
Gates:
Precisely. It’s just a matter of the means you use to provide the revenues
that the government has to have.
Grote:
The estate tax is in this prolonged period of being repealed. It’s
repealed in 2010 and then reinstated in 2011. There are a couple bills
before Congress now to make the repeal permanent. What do you think is going
to happen over the next 10 years? How will this all shake out?
Gates:
I’m an optimist. I believe in the last analysis it will not be repealed.
The current law is totally intolerable. This country cannot have a situation
where a tax is repealed in one year and ten months later or whatever it’s
reinstated at its original level. I don’t think there’s one person in
the Congress who believes that this situation can survive. It’s nonsense.
Grote:
You testified before
the Senate Finance Committee that without an estate tax we would have an
aristocracy of wealth that has nothing to do with merit.
Gates:
It just seems self-evident that it’s a bad thing for the country for a
number of really huge fortunes to go on and on. I mean we saw the examples
in early European days. The aristocracies were not good ways to run those
countries. To have that kind of thing develop in this country does not seem
to me wise. I’m not here to say that I think the estate tax, even at the
55 percent level, makes a huge imposition on that. But between the tax and
the fact that estates tend to be divided among multiple family members, that
is a huge interruption of accumulating inherited wealth.
Grote:
Do you think that the estate tax is a major motivator in people remembering
charity in their estates?
Gates:
It is a factor, but not a major one. Part of what it does is to start people
thinking about charitable giving. There isn’t anyone with the kind of
funds necessary to have an estate tax problem that will not talk to their
lawyer, advisor or whoever without their advisor raising the question of
charitable contributions.
Grote:
So if it wasn’t for the estate tax, some wealthy people might not even
look at the issue of charitable giving?
Gates:
I think that’s possible. Nevertheless, what I really believe, Jim, is that
the primary reason people make charitable bequests is charitable motivation.
Grote:
Does the estate tax cause people to give more money to private nonprofit
charities than they would otherwise?
Gates:
Well, I certainly have a huge affection for private, charitable
operations and am pretty deeply involved in that.
Grote:
You’re running the biggest one there is.
Gates:
I don’t think that there’s the least question that sources, like private
foundations, have flexibility, an ability to experiment, an independence of
political process, that is very desirable for this country. If somebody
proposed to me that every dollar of estates passing above the exemptions
(whatever they may end up at) would go to private charities as distinguished
from the government, that’s too far “over there” for me. Sure, it
would interrupt the passage of these huge pools of wealth and all that sort
of thing that I believe in. But I really do think that some part of a
wealthy person’s net worth should be left at death to support the
government.
Grote:
Critics of the estate tax claim that the estate tax undermines the work
ethic because people are motivated to provide for their children in the
future. Proponents of the estate tax argue that inherited wealth undermines
the work ethic. It’s a hotly debated issue. What are your opinions on the
issue of the work ethic and inherited wealth?
Gates:
Clearly I’m on the side that inheriting money is a negative in terms of
the work ethic. I don’t think there is the slightest doubt about that. To
a major extent, children and grandchildren who come into fortunes without
ever having done anything to earn them are, by and large, not very
productive members of our society.
Grote:
So there could be a connection then between the effect of inherited wealth
on the work ethic and Warren Buffett’s assertion that inherited wealth
inhibits the working of the free market?
Gates:
That is part of what he’s saying. The notion of a whole lot of people
around who could own their own airplanes and their own islands and their own
apartments on Park Avenue and have 15, 20 or even 30 people working for
them, tending to their personal needs, is not very attractive to me.
Grote:
Why has the Gates Foundation chosen
global health and education as two of its primary missions?
Gates:
Bill's willingness to stake very large amounts of
money on the issue of global health seems to me to be a valuable
characteristic of private philanthropy. In our case, for example, the big
investment in vaccines is a huge bet. It’s possible that in some of those
cases (I hope not all) a vaccine will not develop. In those cases, the
foundation’s money will have been devoted to something that ends up with
nothing. To my way of thinking this is part of the ideal of private
philanthropy ─ to enable bets like that to be made, the kind of bets
that are impossible for governments or others to make.
Grote:
So risk-taking really is as important to philanthropy as it is to business.
Gates:
That’s true, Jim. But some of these things we are talking about entail
risks at the level that no business could take. Again, the vaccine is the
perfect example of that. Pharmaceutical companies cannot afford to spend
billions of dollars developing a vaccine that is only needed in a country
where nobody has any money.
This
matter of risk-taking is a hole that is just tailor-made for philanthropists
to step into. And to be honest with you, I haven’t put this at the top of
the list of why I’m a firm believer in private philanthropy.
To
a large extent, we are defined by our environment and the influences of
growing up in a country like this. There isn’t any doubt that there are
huge needs out there and people do respond to them. You drive by a busy
intersection and stop at the stoplight and there’s a lady standing there
with her big cardboard box with a sign on it that says she’s out of work,
she’s pregnant and so forth, and people roll down the window and hand her
five bucks. That happens in this country and it’s a response to a very
human urge.
My
word, if you could imagine a world without philanthropy, it would be
devastating. There would be no art museums, no symphonies ... our
universities would be struggling. It’s fundamental to the quality of life
in this country, and of course the ability to be a philanthropist is a
direct consequence of the environment created in this wonderful country of
ours. It just seems to me so natural that people whose lives have been made
easy, even abundant, from the good fortune of a variety of things, including
the American way of life, that some part of what you’re enjoying should be
used to lift up the position of others, to wipe out diseases, to improve
education, to provide food for the hungry.
Grote:
You clearly see private philanthropy as the “third sector,” after
business and the government.
Gates:
No question about it and, as everybody is beginning to appreciate, it’s
very, very large.
Grote:
Considering the audience you are speaking to here, planned giving officers,
what advice would you have for them in attracting contributions from wealthy
individuals?
Gates:
One thing is to explain carefully the tax consequences of planned
gifts. The truth is, planned giving is just one piece of philanthropy. It is
a marvelous way to carry out a philanthropic urge. I think it’s wonderful.
I don’t know how to make you all more effective salespersons. It seems to
me the case for it is so overwhelmingly attractive that if you have wealthy
people who can’t hear it, then I don’t know what you’re going to do
because the case is certainly there. I have nothing but the highest praise
for what you folks are doing.
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