The Charitable Deduction and American Anti-Statism

[Mlle. Zabzie]

There have been a couple of interesting (or obvious, depending on your viewpoint :P) articles recently in the tax press about the charitable deduction (in particular, Nicholas Duquette in the Business History Review, and Joseph Thorndike, reporting in Tax Notes, all behind a paywall, so haven't linked).  The deduction has been part of the Code since its inception in 1917.  Both authors point out that the deduction has always been intended to (and was in fact created to) subsidize giving by the economic elite, and in fact isn't available except to the very small proportion of taxpayers who itemize (currently 13% of taxpayers).  Duquette points out that the origin of the deduction was Congress trying to make sure that the wealthy did not STOP their charitable giving as a result of the new income tax.  That is, the concern was that the Rockefeller/Carnegie/etc. money would stop being put to public use, and instead the government would find itself having to pay for programs previously funded voluntarily by philanthropists.  The deduction was therefore conceptualized ab initio as a subsidy to the private welfare state (and they cite legislative history in support of this intention).  It wasn't until the 1970s that people started talking about the deduction as an expenditure (i.e., as what it would cost in terms of revenue loss) rather than what the deduction saved the fisc (interesting, right?).  And it has managed to persevere, notwithstanding budget gaps, etc.  Why?  Thorndike posits that the reason is the "powerful American Traditions of anti-statism", and theorizes that it persists because it is "enmeshed with popular suspicion of governmental activism."   This all seems right to me.  It is a bit of a weird policy holdover from the end of the gilded age, benefits very few, and yet is a sacred cow.  Discuss.

[Ormond]

I guess one thing I would like to know in order to discuss this properly is whether or not other countries which have national income taxes include any charitable deductions in their laws, and whether or not there is any cross-national research about how giving these deductions does or does not affect charitable giving. 

[sologdin]

rather than what the deduction saved the fisc (interesting, right?). 

totally.  it seems as though the shift is in the assumption of who bears responsibility for humanitarian assistance?  previously thought to be within the purview of those sufficiently pecunious to bear the expense, the obligation later transformed into a matter of democratic decision for the public, or so. i can see why ayn rand had fits about it.

do we know what the value of the expenditure is, in relation to the federal budget?

[Mlle. Zabzie]

28 minutes ago, sologdin said:

rather than what the deduction saved the fisc (interesting, right?). 

totally.  it seems as though the shift is in the assumption of who bears responsibility for humanitarian assistance?  previously thought to be within the purview of those sufficiently pecunious to bear the expense, the obligation later transformed into a matter of democratic decision for the public, or so. i can see why ayn rand had fits about it.

do we know what the value of the expenditure is, in relation to the federal budget?

Yes - and the JCT sneakily breaks it into 3 to hide it.  For 2019, I believe for education, it is $7.3 billion, health, 3.3 billion, and everything else $31.3 billion (total 41.9 billion).  Compare this to the over all budget of ~$4 trillion. source 

Ormond - I think many countries do.  I'm not sure how available they are to the general populace.  One of the really interesting things about the US deduction is that is by design the wealthy.  Because of the standard deduction, most (87%) Americans don't really see a tax benefit from their own charitable giving.

[Maltaran]

2 hours ago, Ormond said:

I guess one thing I would like to know in order to discuss this properly is whether or not other countries which have national income taxes include any charitable deductions in their laws, and whether or not there is any cross-national research about how giving these deductions does or does not affect charitable giving. 

The UK does Gift Aid, which is a scheme where, when you give a donation to a charity, they can then claim back from the Treasury an amount equivalent to the tax you paid on the amount of your donation.

[Kalbear]

In addition to that, much of the benefit from charitable giving goes to corporations, who encourage employees to donate and then match those donations. Which is especially weird to me - the employee gets nothing and the Corp gets to basically mark it all as a contribution. 

Also also, what constitutes a charity in the US is very loose. My sons gymnastic organization has a charity part which runs the meets and sends the kids to competitions, and it isn't for profit- but the idea that upper middle class kids need a charity for this is ludicrous to me and it's done entirely so a lot of companies workers like boeing can match the time volunteered. 

[maarsen]

Rather than giving to charity, I volunteer my time for what I consider worthy causes. This does not give me a tax deduction as would be the case if I donated the equivalent amount of money. I am aware of how my time is spent but have no such controls over any gifted money.

I imagine the reverse is the impetus for the wealthy to donate money rather than time.

[Ormond]

1 hour ago, Maltaran said:

The UK does Gift Aid, which is a scheme where, when you give a donation to a charity, they can then claim back from the Treasury an amount equivalent to the tax you paid on the amount of your donation.

I am unsure what you mean by "claim back" here. Are the charities themselves taxed but get some of that refunded when someone uses "Gift Aid"? 

And do you pay a special tax when you donate that's given back? I'm just unclear as to what the exact parameters of this are from your description. 

 

[ants]

In Australia charitable donations are tax deductible. Everyone can get them, but because of our progressive tax system the rich benefit more from giving. Not sure how it works for companies. 

I’ve always had mixed feelings about it. One of my major issues is that it means the government is subsiding this but giving up control. So there is nothing to say the money spent is efficient. 

Eg. Lots of money goes to cancer charities. But is the split between research and care smart? Do some cancer types get left in the cold while others get to much? Is the research into the right things?

[Larry of the Lawn]

24 minutes ago, maarsen said:

Rather than giving to charity, I volunteer my time for what I consider worthy causes. This does not give me a tax deduction as would be the case if I donated the equivalent amount of money. I am aware of how my time is spent but have no such controls over any gifted money.

I imagine the reverse is the impetus for the wealthy to donate money rather than time.

Love that volunteering is giving the only thing that is universally scarce for all of us - time.  And because of this it's insanely rewarding on a kind of selfish level - I wished I'd discovered this earlier in life.   Having a focus outside of my work and social life has filled an empty place in me.

[Fragile Bird]

Just curious to know how Canada compares to the US.

In Canada you get a federal tax credit of 15% on the first $200 you donate, and 29% of anything above $200, up to 75% of your net income. It can be up to 100% of your income if you donate environmentally sensitive lands or important cultural property. In addition, each province has tax credits, ranging from 4% to 20% on the first 200 to 11.16% to 24% on amounts above the 200. I live in a cheapo province where the amounts are only 5.05% and 11.16%. If you are in the highest tax bracket you get a maximum tax credit of not even $400 on a $1000 donation. It used to be better. Quebec has by far the best tax credit, 20% on the first $200 and 24% on amounts above $200.

I don’t think the tax credit plays a big role in charitable decision making. I have friends who don’t give a damn about tax credits, they pretty well never donate anything to anyone, and other friends who, while happy to get a tax credit, would still donate regardless of the credit. You either believe in giving to charity or you don’t, IMO.

eta: I assume everyone knows the difference between a tax deduction and a tax credit. A deduction means you subtract the amount of the donation you made from your reported income, reducing the amount of money the government calculates tax on. A tax credit is an amount deducted from the amount of tax you owe.

[The Anti-Targ]

12 hours ago, Ormond said:

I guess one thing I would like to know in order to discuss this properly is whether or not other countries which have national income taxes include any charitable deductions in their laws, and whether or not there is any cross-national research about how giving these deductions does or does not affect charitable giving. 

New Zealand used to have a maximum claimable rebate of about $1300. A decade or so ago the cap was removed, now you get 30% back however large your charitable giving for the year is. At about the same time the amount of cold calling asking people to give monthly charitable donations increased a great deal, and as soon as you signed up for one your personal rate of receiving calls increased even more. And there's the door knockers too.

I guess because the cold calling and door knocking persists the effect of removing the rebate cap has meant an overall increase in charitable giving. But I'm not aware of any research on it here.

[Maltaran]

12 hours ago, Ormond said:

I am unsure what you mean by "claim back" here. Are the charities themselves taxed but get some of that refunded when someone uses "Gift Aid"? 

And do you pay a special tax when you donate that's given back? I'm just unclear as to what the exact parameters of this are from your description. 

 

You pay your income tax in the normal way. When you donate, the charity then goes to the Treasury and gets an extra equivalent amount (so if I donate £100, they can then get an extra £20 from the government).

[Iskaral Pust]

I’ve always opposed the charitable deduction.  I think it is bad policy to allow wealthy people a unique privilege to determine where their tax dollars are spent.  I can understand the original concern in an era of transition from privately funded social safety net charities to an under-developed public social safety net, but that has not been the case for a long time.

I believe there are statistics showing lower income people tend to have a higher rate of charitable giving as a % of the income, but the charitable deduction is effectively only available to a small slice of wealthy people (in the US, anyone with the standard deduction or paying AMT cannot deduct charitable donations).  So even if you want to rely on philanthropy for social services, it’s still not applied fairly.

Moreover, the non-profit sector is a hotbed of corruption, self-dealing and inefficiency, but a virtuous halo effect insulates them from appropriate scrutiny and accountability.  You have a wide spectrum from groups that shouldn’t receive this benefit, like hugely wealthy universities and highly profitable “non-profit” hospitals that are tax-exempt, to religious organizations effectively receiving financial support from the state (exempt from property tax as well as income tax, plus deductions to their donors), to billionaires using charitable trusts to redirect their taxable estates into pet projects (possibly outside the borders of the state losing that tax), to charities with very high “administrative” costs basically paying a bloated staff at the expense of the stated mission or paying a huge commission to professional fund-raisers (especially telemarketing), to redundant vanity charities (imagine if all the small foundations to cure cancer merged into a single efficient entity, but they no longer had individual names attached), to outright embezzlement.

I would abolish the charitable deduction.

[Rorshach]

Norway has a tax deduction for charitable donations, provided that a) the recipient is approved in advance (I guess almost all charities are, I've never experienced any excemption) and b ) the gift (over the course of the year) exceeds $50 (500 Nkr). 

There is a max level of deduction, but I don't know how large it is.

[The Marquis de Leech]

For what it's worth, charitable giving tends to go towards high-end elite causes (private schools, art galleries, and opera), rather than alleviation of poverty. Not only is the charitable deduction giving power to the rich, it rewards their interests.

[Mentat]

In Spain you can get a deduction from your income tax of up to a 10% of your liquid income for donations to approved charities. Since the % of your liquid income that is paid as tax is progressive, the deduction is progressive on paper, though people with low income obviously have less disposable income to spend on charities.

I'd guess a good amount of charity donations goes to the Catholic Church.

 

4 hours ago, The Marquis de Leech said:

For what it's worth, charitable giving tends to go towards high-end elite causes (private schools, art galleries, and opera), rather than alleviation of poverty. Not only is the charitable deduction giving power to the rich, it rewards their interests.

This is interesting. Do you have some numbers or stats available you can share?