Tax Breaks for Charity

It's been the tax policy of our government for decades now to utilize the tax code to encourage people to donate privately to charity, in exchange for what can be fairly substantial tax breaks. The basic assumption is that private individuals can do a better job of allocating money efficiently to public and charitable service than the government can. But as this NY Times article points out, in an age when private individuals are wealthier than ever, this basic assumption is coming under question:

What qualifies for that tax deduction has broadened over the 90 years since its creation to include everything from university golf teams to puppet theaters — even an organization established after Hurricane Katrina to help practitioners of sadomasochism obtain gear they had lost in the storm.

Roughly three-quarters of charitable gifts of $50 million and more from 2002 through March 31 went to universities, private foundations, hospitals and art museums, according to the Center on Philanthropy at Indiana University.

In contrast, few gifts of that size are made to organizations like the Salvation Army, Habitat for Humanity and America’s Second Harvest, whose main goals are to help the poor in this country. Research shows that less than 10 percent of the money Americans give to charity addresses basic human needs, like sheltering the homeless, feeding the hungry and caring for the indigent sick, and that the wealthiest typically devote an even smaller portion of their giving to such causes than everyone else.

Of course we all hear stories about wealthy donors who contribute to their favorite museum, concert hall, university, etc. (in other words, things that they can get their name on) but I had no idea that so little of the money contributed went to the basic needs of America's poorest citizens. One of the philanthropists interviewed for the article justifies his particular approach:

Like many major philanthropists, Mr. Broad said he considered such gifts an illustration of the Chinese proverb: “Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.” The argument is that simply taking care of the poor does nothing to eliminate poverty and that they will ultimately benefit more from efforts to, say, find cures for the diseases that afflict them or improve public education.

Fair enough. But can private individuals, making decisions each on their own with no broader consensus, fairly allocate their donations between say, libraries that benefit the public as a whole, and donations to poor people that benefit them directly? I think the answer is no, and that's the greatest weakness of our present approach. A second is how much this system is costing us:

[Warren] Buffett recently has brought attention to himself as a critic of inequities in the nation’s tax system, which offers the wealthy better tax breaks for charitable giving than it does the average taxpayer. Deductions for charitable giving can be claimed only by the fewer than half of all taxpayers who itemize, and those falling in higher tax brackets get bigger deductions for cash gifts.

The charitable deduction cost the government $40 billion in lost tax revenue last year, according to the Joint Committee on Taxation, more than the government spends altogether on managing public lands, protecting the environment and developing new energy sources.

In other words, many taxpayers pay too little in tax to get anything from the charitable deduction, and those in higher tax brackets cost the government more than those in lower ones, because their tax break spares them from income tax at a higher percentage rate.

Ten percent to America's most basic needs strikes me as being far too low to justify the system we currently have. Wealthier taxpayers should not be able to skate on their contributions to American's public needs by donating millions to universities and the arts and denying the government millions more to spend on those basic needs as a consequence. At the same time, I don't think this means we should abolish the charitable tax credit. One approach would be to cap how much can be given in charitable contributions; right now the limit for most contribution is 50% of adjusted gross income. Roughly speaking, you can donate about half of what you make in a year, and pay no taxes on that income. A lower cap would allow private individuals to continue giving, but subject more of their income to tax.

Another approach might be to limit the organizations that a private individual can donate to. The IRS already does that, but as the article points out, it's still a pretty flexible system. Congress could take steps to limit donations to organizations that serve the basic needs of Americans, or even go so far as to require a certain percentage of donations to go to such organization for the individual taxpayer to gain the deduction.

These are just two ideas, and surely there are better ones out there which are worthy of discussion. Grand change may not be in order, but there's no reason why can't revisit the basic assumption the tax code makes and require a more just allocation of private charity.