Let's Take a New Look at Charitable Giving

After 92 years of being the subject of countless discussions, essays and dissertations, one might assume that economists and others might have a reasonably good understanding of what motivates people to donate to charities. It was in 1917 that the charitable deduction was first enacted into the federal tax code and, here we are in 2009, still arguing about whether or not President Obama's proposal to reduce the tax deduction for charitable contributions by the very wealthy will result in any drop-off in giving. Shouldn't we know by now?
In February of last year, President Obama put forward the idea of lowering the tax deduction of individuals earning $200,000 or more, and families earning $250,000 or more, who make donations to charities to 28 percent, down from the current 35 percent. The additional revenues that the federal government might expect to receive has been estimated at $318 billion over 10 years, and there are certainly plenty of uses for that money. The president's view, one that Republicans have long held, is that the tax code isn't the impetus for charitable giving and that nonprofit organizations and institutions are better served by a prospering economy.
His proposal, however, drew a range of responses, much of it critical, from the nonprofit world - worried that reducing the deduction would lessen the incentive to give - and from conservatives, who complained that the move would place more power in the hands of the federal government, usurping the right of ordinary citizens to determine how the spend their own money.
The Washington, D.C.-based Center on Budget and Policy Priorities, for instance, released a statement that charitable gifts might decline by 1.3 percent, and the Center on Philanthropy at Indiana University has estimated that overall giving would decrease 2.1 percent, and that donations by the highest-income households would drop even more, to 4.8 percent, resulting in a loss of $3.87 billion to charities. The president of one coalition of nonprofit foundations and charities called the Administration's proposal "a stake in the heart."
Does any of this bear scrutiny? Looking back, the 1986 Tax Reform Act was heralded as a catastrophe for charities: The Washington, D.C.-based Independent Sector led the charge against the legislation, predicting an $11 billion reduction in donations due to lowering the top marginal tax rate from 50 to 38 percent -- reducing the value of a donation by 24 percent -- and the elimination of the nonitemizer deduction for charitable contributions. It didn't happen. In fact, a year after the law's enactment, according to Independent Sector, nonprofit groups recorded a cumulative 10 percent increase over the year before, the same ratio that held steady throughout much of the 1980s.
Similarly, the gradual elimination of the estate tax, for which the amount exempted has increased from $675,000 in 2001 to $3.5 million in 2009, has not diminished the willingness of wealthy collectors or their heirs from donating property to charitable nonprofit institutions. Museums continue to report substantial bequests and gifts from heirs. Since the estate tax largely applies to the appreciation of assets, such as real estate or artwork that previously was never subject to income tax, one might have thought that the lessening of the estate tax burden should have altered the way this property is treated by owners, heirs and accountants. Perhaps, then, the tax code has no appreciable effect on the willingness of people to make donations to charitable organizations. "Certainly, people give because they want to give," said Andrew Finch, former senior director of government affairs for the nonprofit advocacy group Americans for the Arts. "Altruism exists."
At times, it may seem that predictions of decreased giving because of some change in the tax rates are instances of running the numbers based purely on economic models, rather than on how individuals actually behave. The tax code may not determine if people make donations but how and when; it may serve to organize the process of charitable giving rather than determine whether or not it takes place. A 2006 study on "Charitable Practices and Motivations of Wealthy Individuals" by the Center on Philanthropy at Indiana University found that "[W]ealthy donors report that even major tax policy changes would not impact their giving."
However, according to Patrick Rooney of the Center on Philanthropy and the principal author of the study, "people respond to incentives, and when you take away from donors the appreciating value of property they would donate, they may look to alternatives, such as selling." Selling, of course, may mean that the taxpayer now has to pay a capital gains tax, generating revenues that can fund social services, benefiting all of us.
Our ability to see the question of how and if and tax code motivates or affects charitable donations has been hopelessly clouded by our political leanings. As a people, we may be divided in our understanding of how to help people who need assistance and whether or not the reliance on charity should benefit the donor as much as the recipient. In Europe and Canada, taxes are higher, but there are far more government-run social services and, compared to the United States, quite minimal individual giving. If the question of what are tax code is supposed to do cannot be resolved, let's hope that it doesn't take another 92 years to figure out what we owe our fellow citizens.

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