giving to charityAmericans have long been known as a very charitable people.  According to the World Giving Index, we give more to others than any other national group.  As yet another national and state income-tax filing deadline has come, it is appropriate to revisit the issue raised in the 17 December 2012 issue of the Wall Street Journal “Should We End the Tax Deduction for Charitable Donations?”  As one of the article’s authors stated, “The charitable deduction is unique in that it’s a government incentive to sacrifice on behalf of the commonweal.  Unlike incentives to save for retirement or buy a home, it encourages behavior for which a taxpayer gets no direct, personal, tangible benefit.

One can also make a good case that charities are much more effective at actually solving social problems and helping those in economic or social distress than are government bureaucracies whose incentive is to “manage” problems rather than solve them so as to perpetuate their reason for existence.  As this same author argued “Charities are among the most effective institutions in the country and are getting better.  They operate lean and mean because they have to.  They are monitored by bureaucracies, donors, their own volunteers, and the communities they serve.”

On the other hand, it is often suggested the Charitable Deduction be dropped because it is mostly of benefit to the well-to-do.  The reason for that is that most lower-income households do not find it to their advantage to itemize under our current system.  The more appropriate response to that inequity is not to drop the charitable deduction, but rather to make it a credit against one’s gross income before net taxable income is determined.  Everyone, not just the rich, should be treated the same for this purpose.

And without data on how much non-itemizers have been giving over the years, it is impossible to claim with confidence that charitable giving has remained constant over the years even as tax rates have changed.  The most recent research on this topic by the Indiana University Lilly Family School of Philanthropy established that “Americans gave nearly $300 billion to charity in 2011, and 65 percent of Americans give each year.  The school’s research also shows that the amount of tax benefits an individual receives from giving tends to affect the amount that a person gives to charity . . . and is an essential component to the creation of a caring and thriving society.

Given how many are in need year in and year out, and how many more are in need since the economic downturn in our economy and the slow recovery, let’s make it easy for people to get credit for doing the right thing, to help others instead of themselves.  Let’s replace the current deduction for charitable giving, which is only of use to those few who itemize, and allow everyone to take any charitable contributions “off the top” before determining their net income for tax purposes.

Photo credit: Rikkis Refuge via Flickr (CC By 2.0)

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1 comment
  1. I used to work for the Center on Philanthropy at Indiana University (the organization referenced) while I was working on my masters in philanthropic studies. We do, in fact, have information on non-itemizers and their giving habits through regional and national surveys. Certainly there is no way to confirm whether they would give more to charity if they could deduct gifts (The one way to test this would be to see if any states allow deductions of charitable giving off of state taxes, then compare these to neighboring states or years before the law was implemented, though even then, the tax benefit would be quite low, and likely unable to effect a change in behavior)

    I agree that there should be the ability for all donors to take giving “off the top.” I figure the easiest way to do this would be an extra line on the 1040-EZ to allow “just this one” itemization. Perhaps tax folks wouldn’t like complicating the EZ, but when have we trusted the IRS to keep things uncomplicated.

    One point I would clarify, though, is why charitable deductions tend to benefit wealthy donors (and therefore the types of charities wealthy donors support more often, like the arts and education) This article made it seem as though the ability to itemize is the primary reason for the inequality, and it is, in fact, only a small portion. It all comes down to the marginal cost of giving a dollar to charity. For a person making a relatively low income and paying 15% in taxes, when she itemizes her deductions, she pays $15 for every $100 earned. If she decides to give $100 to the local animal shelter, it only really costs her $85 to give that gift, because in her mind, $15 was going to go to the government anyway. She happily gives $100, deducts $100 dollars, and pays $15 less in taxes that year. Her neighbor works at McDonald’s and doesn’t itemize his taxes. He faithfully gives $100 to his church, but since he cannot itemize, he gets no tax benefit from his generosity and it “costs” him $100. Finally, her other neighbor (It’s a very diverse community) makes lots of money and pays 35% in taxes. When he gives $100 to the symphony, it only “costs” him $65. He thinks about it a minute, and says, “hey, at that rate, I can give another $50. It’s awesome being rich.” He donates more.

    Oddly helped by the tax code, the symphony gets higher amounts of donations than the church or animal shelter, and everyone collectively scratches their heads to come up with a fairer plan. If we changed it to make giving less lucrative for the wealthy, we might stifle giving and hurt charities, but some sort of government match or active intervention (over and above the sensible step put forward in your article) would be interpreted as government actively subsidizing all non-profits. It’d also open a can of worms about the two theories of why government doesn’t tax charities going back to English Common Law in the 1600s that you don’t wanna read about.

    Suffice it to say allowing charitable deductions helps charities and disproportionately allows the rich to have a greater impact, but it’s a catch-22 we’ll have to live with for the foreseeable future.

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