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Before we get going, can we ask that you think about giving to your member station this year?Link here. Great, now that that's out of the way, can we talk about whether the charitable deduction on the federal income tax makes any sense at all?
The holidays are approaching. The Salvation Army's red kettles are jingling. Canvassers are canvassing. Public radio hosts are pleading. "Giving Season" is upon us, and it benefits a lot from the charitable tax deduction. But the reality is, only a sliver of taxpayers will receive this tax benefit.
The charitable deduction dates back to 1917. As the United States geared up for World War I, the federal government raised the top income tax rate from 15% to 67% on the richest Americans. America's federal income tax, which had been implemented just four years before, became far and away the most progressive on the planet.
As the tax bill snaked its way through Congress, nonprofits worried that rich philanthropists, like Andrew Carnegie and John D. Rockefeller, would stop giving in light of the new tax. After all, if they were forced to give away so much of their fortunes to the greater good, why would they give yet more to the greater good? So New Hampshire Senator Henry F. Hollis, who also served as a regent for the charity-dependent Smithsonian Institution, proposed that taxpayers should be able to deduct charitable donations from their tax bills. The charitable deduction was born.
Ever since, a long line of economists has argued that the charitable deduction is insane. It's a massive hole in the federal budget, resulting in the loss of billions and billions of tax revenue every year. It makes the tax system more distortionary and complicated. The only people who get the benefit are those who forgo the standard deduction and, instead, itemize their deductions; itemizers are typically rich and have good accountants and lawyers. The deduction is made even more regressive because the higher your tax bracket, the more you save by using it. This skewed subsidy means the charitable deduction benefits mostly nonprofits preferred by rich people, like museums and universities, and not the ones preferred by regular folks, like churches and soup kitchens.
Which is why many economists hoped that the charitable deduction would be reformed with the Tax Cuts and Jobs Act of 2017. It was not. In fact, the Act might have made some problems worse. The Act doubled the standard deduction, which economists liked because it made the tax system simpler for more people. That's good, but, in so doing, the reform made the charitable deduction even more regressive. According to the Tax Policy Center, only about 10 percent of taxpayers now itemize their deductions (before it was around 30 percent).
The fall in itemization contributed to a massive fall in people who claim the charitable deduction. Overall, in 2018, despite a strong economy, American households reduced their charitable giving by over $15 billion, the largest decline since the Great Recession. It seems clear the reason is the change in the tax code reduced the incentive to give for many taxpayers.
The New Anti-Philanthropy Movement
A hundred years ago, Americans viewed powerful philanthropists with suspicion. Even Republicans like Teddy Roosevelt and Wlliam Howard Taft criticized the efforts of industrialists like John D. Rockefeller to get governmental support for their foundations.
Over the last few years, a genre of anti-philanthropy books has emerged. These include Just Giving by Rob Reich, Decolonizing Wealth by Edgar Villanueva, and Winners Take All by Anand Giridharadas. Their basic message: big philanthropic organizations siphon away taxpayer dollars needed for public use, and this system empowers plutocrats and weakens democracy.
But there's a strong case to be made that citizens should have some power to direct government spending towards their preferred causes. There are countless nonprofit organizations that do amazing work serving the public good. It's possible to provide governmental support to nonprofits in a more democratic way, with all citizens getting the opportunity to get a tax subsidy for charitable giving.
Last week, Senator Mike Lee (R-Utah), the Chairman of the U.S. Congress Joint Economic Committee, released a report suggesting two potential reforms to the charitable deduction. One would make the deduction "above the line," meaning those who don't itemize their taxes (and instead take the standard deduction) can also deduct their charitable contributions for extra tax savings.
The other proposed reform, favored by economists like Richard Thaler and political scientists like Rob Reich, would replace the charitable deduction with a charitable tax credit. A tax credit would mean that whether you take the standard deduction or not, you'd still be able to see tax benefits from your charitable giving, and taxpayers in all income tax brackets would be able to get an equal percentage of government subsidy for their charitable contributions. This would make the system fairer — and it would be a boon for the nonprofits loved by the vast majority of American taxpayers who are currently excluded from the tax program.
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