Last month, several proposals have circulated that involve eliminating tax deductions for charitable donations as part of the larger strategy to address the federal budget deficit. The Obama Administration supports, not for the first time, a re-design of the charitable deduction towards a tax credit. More detail on the proposals can be found here and here and one interesting economist's view here.
This discussion provokes kneejerk reactions from nonprofit colleagues and many well-meaning liberals who can’t believe that along with cutting social programs and nonprofit funding streams, now we are also planning to dis-incentivize charitable donations, causing more financial trouble for struggling nonprofit service providers.
Many observers in the last few weeks have written about the inherent “goodness” of charity, how it aligns with Christian principles, and how people should share their wealth and act charitable with or without tax deductions. Most people do in fact give without much regard for tax implications. I agree that they should. And data suggest that limiting the tax break does not reduce giving in the long term. But that’s not even the issue.
Publicly subsidized philanthropy is one of those issues that might find you on the opposite side of the opinion spectrum, if you do a little bit of homework.
The issue is one of political and economic theory. But first, let’s get the current system straight:
A taxpayer with an annual income over $250,000 has a 35% federal income tax rate. This person itemizes deductions on his/her income tax return, in order to minimize the income that is taxed at that rate. So s/he deducts her mortgage payment, business expenses and a charitable donation. The percentage that this taxpayer can write off for their donation is the same as their tax rate, so 35% for the high-income taxpayer. The $5000 check to the symphony orchestra creates a write-off of $1750, and tax savings of more than $600.
As a result, the federal government loses income tax revenue, currently estimated to be at $237 billion for 2009-2013.
A donation made by a lower income taxpayer can only be written off at the lower percentage that equals his or her tax rate, and the 70% of taxpayers who do not itemize their deductions cannot write anything off.
So, if you make $60,000 a year, and deduct your $100 public radio pledge, along with your year end donation of $200 to the local food bank or women’s shelter, this lets you write off exactly $75, resulting in tax savings of about $18. If you are part of the 30% of taxpayers who itemize, that is. I have to conclude that these smaller donations are apparently made for the sake of the cause, not the tax break.
Ok, so now we get how the system works, and it already doesn’t look that great or fair anymore…..However, part of the “homework” is also understanding the role of philanthropy in the context of the mainstream US economic philosophy. That is, the belief system that is based on “government is bad”, and so are taxes, and if you haven’t realized the American Dream, it’s probably your own fault. If you are wealthy, on the other hand, you should have as much say in how your wealth is spent as possible. Taxes give that say to the public (and its representative, the “bad” government). Donations leave it up to the donor. Philanthropy supports the current economic paradigm.
What the current charitable deduction arrangement does then, is put what otherwise would have been tax revenue in the hands of the wealthiest Americans, so they, not the federal government can decide, which causes the “shared” portion of their income supports. So instead of using income tax dollars to fund social programs (or socialist causes, as some would call them, aimed at the – god-forbid - redistribution of wealth, benefiting the poor), the dollars are used for the causes chosen by the richest Americans.
So what are those causes? The list of recent top donors kept by the Chronicle of Philanthropy, shows they gave to either universities/colleges, hospitals or other large health care organizations, as well as a few foundations. The database (of gifts $1 million and over) shows for 2010, that 201 gifts were made to colleges and universities (the biggest starting at $200 million); 36 to health (many of which are university hospitals); four (4) to human and social service organizations (totaling $9 million), six (6) to community foundations, one (1) to children and youths.
So this is the distribution of shared income when left to the (in this case, very) wealthy. If we look at this from an economic perspective, an often heard argument for continuing the tax subsidy states that the public benefit of these donations outweighs the loss to the US Treasury. However, because of the plutocratic bias of the donations, they do not create public goods [1] that are accessible to everyone, but rather goods whose beneficiaries are -- wealthy people . Philanthropy perpetuates the current economic model and its ugly side effect, the ever widening inequality of income and wealth.
Philanthropy is publicly subsidized plutocracy. I would not fret as much about the fact that the wealthy are funding “causes” that benefit the wealthy by itself. However the subsidy (i.e. the tax deduction) eats into the tax base that should benefit all citizens, and provide the underprivileged with the same chances at health, education and economic opportunity.
Instead of kneejerk reactions to the “threatened” tax deduction, nonprofits and their advocacy groups should engage in a discussion that reflects the social justice values of our sector, and that argues for differentiation in the definition of "charitable". A re-design of how we incentivize philanthropy could start there, include equal treatment of donors regardless of their income, and lead to a new system that benefits those affected by poverty, rather than those who are already wealthy.
[1] The goods created are not public goods, because to be public goods they would have to be non-rivalous and non-excludable. Universities and health systems exclude people who are unable to pay for their services.
