Simple Deduction

Given that I am neither a policy analyst nor an economist, I am surprised by the number of people who ask me (as though I possess some special knowledge) about the impending fiscal cliff. Then again, people also ask me my opinions about major league baseball, and I have never faced a fastball over 45 mph, or whatever my pals in fifth grade could serve up. So I am used to opining authoritatively on topics about which I have only a limited and distant understanding.

But for one specific question about the current negotiations, I have a ready answer: “Would reducing the charitable deduction hurt charitable giving?” And my answer is: “Yes, of course!”

There are some who say it shouldn’t be so. A typical line of commentary was found in Michelle Singletary’s recent column in the Washington Post. She and her husband tithe to their church and give to other charities, and she asserts that they would do that regardless of the tax deduction. She asks: Shouldn’t everyone feel that way? Why do people need a charitable deduction to encourage them?

My take is that charitable giving is a blend of the heart and the mind. Certainly a significant, even dominant, part of charitable giving is emotional. It feels good to give to nonprofits you care about, and (for most people) it also feels good to be recognized for your generosity. The act of giving provides donors with a sense of significance. People want to make the world a better place. It feels good. It feels right.

But the mind plays a big part in the process. Many of the choices in charitable giving are essentially pragmatic – for example, giving to a cause associated with an important business colleague, or donating to the school your children attend, or giving to the homeless shelter that provides indigent people with a place to sleep other than the doorstep of your retail business. Donors develop strategies about their philanthropic priorities. And certainly, central to these calculations, the charitable tax deduction plays a major, ongoing role.

And the charitable tax deduction has played that role for nearly a century, starting with its creation in 1917. The federal income tax (which at the time only applied to the very wealthy) was only a few years old at the time, and taxes had risen significantly to support America’s entrance into World War I. Policy-makers feared that, faced with a large income tax for the first time, these wealthy citizens would abandon their traditional support of charitable endeavors. If the rich stopped donating to charity, that would not only threaten those institutions, but would conceivably cost the government money, because it would now have to fund some of those causes itself. The solution? The charitable income tax deduction.

Considerations about tax deductions have been baked into the process of donations ever since. It’s disingenuous to think that we could limit the deduction without affecting charitable giving.

For those Americans who don’t itemize their taxes, which is to say those with the fewest assets and the lowest incomes, the presence or absence of a charitable deduction makes little difference. But for those who itemize, particularly the very wealthy, it’s a major consideration.

I have worked over the years with some extraordinarily generous donors. Conversations with some of these people tell me that a limit on the charitable deduction would indeed cause them to reduce their contributions. They’d still give – but not as much. And because so much of the charitable giving in this country comes from the wealthy, that tells me that overall donations to charity would drop considerably.

Look at it another way. Two of the other deductions mentioned for possible elimination or reduction are those for home mortgages and real estate taxes. The realtors’ lobby has asserted that eliminating these deductions would lead to a precipitous drop in home values, which in turn would trigger an economic downturn. Why would home values drop? Because the tax advantages of home ownership have been factored into cost of the homes. Taking away the deductions would lower the value of home ownership — and consequently, home prices would fall.

The same goes with charitable giving. If the tax incentives are removed, people will still give to charity, much as they’d still own houses – but they would give less to charity, in the same way they would pay less for their homes.

It’s worth noting that Americans give more to charity than people of any other nation. Some observers take this fact and conclude that we are the most generous people in the world. I’ve heard that claim often. I don’t think it’s as simple as that, because we rank 27th out of 30 developed nations in the percentage of income devoted to taxes. In other words, we are cheap in terms of how we tax ourselves, and we are generous in terms of how we donate to charity. And to a certain degree that cheapness and that generosity both stem from the charitable tax deduction. For nearly a hundred years we have imposed a relatively light tax burden, but we have rewarded people with yet lower taxes if they donate generously to charity.

There is a tricky equilibrium in the charitable giving process. My long-time readers know that I’m not shy about putting forth new ideas to shake up the system, including some related to the tax deduction. I’ve even gone so far as to suggest that certain types of gifts (like those to donor-advised funds or private foundations) should not get the same full charitable deduction as gifts to nonprofits that provide services. But a wholesale change of the system of charitable giving that eliminates or reduces the charitable deduction a donor can receive is simply not a good idea. It’s not that I’m afraid of unintended consequences. Rather, I’m afraid of the logical consequences. If we reduce the charitable deduction, donors will give less, and nonprofits and the people they serve will suffer.

Copyright Alan Cantor 2012.  All rights reserved.

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2 Comments. Leave new

  • Alan, You are spot on. I think a change in the charitable deduction laws is needed but should not be eliminated for those contributions made to organizations that provide services to those in need. I also agree that eliminating the deduction for mortgage interest and property taxes will have a direct negative effect, especially, on the middle class. I hope our governmental leadership can clear their heads out of their butts and make logical changes that really make sense. I’m not all that confident that their heads are already buried too far as to not be able to see the light.

  • Jane K. McLaughlin
    December 16, 2012 10:35 am

    Alan – I agree with you wholeheartedly about this potential change. Given that it is a certainty that there will be programs that receive less government support, it makes no sense to not encourage the private sector to help shoulder some of these costs through charitable deductions. I know that this would probably add a layer of complication when the tax code needs to be simplified, but I’ve always thought that all charitable deductions aren’t equal. Donations made to soup kitchens and homeless shelters, for instance, should be treated differently than donations made to build an art palace. Again, this would be difficult to implement and monitor, but we absolutely need to keep programs in place that target the least served.


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