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Taxing the Investment Income of Foundations Is Consistent With Good Tax Principles, but Fixes to OBBB Plan Are in Order

Taxing the investment income of tax-exempt assets is no different from how investments in 401(k) accounts are taxed.

The philanthropy community is up in arms that the House’s One Big Beautiful Bill (OBBB) would increase taxes on the net investment income of private foundations by as much as $1.6 billion per year, or $15.8 billion over the next decade, according to Congress’s Joint Committee on Taxation (JCT).

Groups such as the Philanthropy Roundtable claim the change amounts to a 600% tax increase on private charity,” which the Council on Foundations says threatens to reduce funding for communities in need.”

These claims are greatly exaggerated. Taxing the investment income of tax-exempt assets is not a tax on the assets themselves, nor, as activists imply, is it a tax on charity. Indeed, this treatment is no different from how investments in 401(k) accounts are taxed. Individuals deposit tax-deductible contributions into their 401(k) accounts and then pay ordinary income tax rates — as high as 37% — when they withdraw funds during retirement.