February 25, 2014 | Read Time: 5 minutes
Much of organized philanthropy accepts the idea that the federal tax code’s charitable deduction is both a valuable motivator and an appropriate acknowledgment of charitable giving in America. Not surprisingly, whenever the idea is floated to change or abolish this current IRS provision, many philanthropic leaders quickly engage to block such a move.
And why not? Those of us who run foundations, as well as those from the organizations we and our many donors support, look upon this deduction as a classic multiple-win. Many people in philanthropy consider it a key element of public policy undergirding the tradition of charitable giving in America, which totals more than $300-billion every year.
Nonprofit leaders and others also like to point out the strikingly wide range of worthy organizations in communities across the country that benefit from the tax break, including clinics and churches, schools and symphonies, food pantries and opera halls.
Unfortunately, the rush to protect the status quo generally overlooks a worrisome inequality: the charitable deduction primarily gives benefits to the wealthiest in our society, while minimizing the generosity of millions of others.
Two-thirds of American taxpayers do not itemize deductions. This means that the vast majority of donors are not entitled to this robust tax subsidy. And yet if charitable intentions are measured by proportion of income, they are giving just as generously as the top third.
If, as philanthropic leaders, we believe that the charitable deduction effectively stimulates giving, then why turn a blind eye to this inequality? And if we believe that it is wise public policy to subsidize donations by individuals, why are we silent when this benefit is denied to the majority of taxpayers?
We shouldn’t be.
Fortunately, plenty of good and eminently workable ideas have been proposed to correct this imbalance, to the benefit of all.
In December, the Committee for a Responsible Federal Budget took a fair look at the pros and cons of the arguments on this issue. Of particular note is its conclusion that there are “a number of ways to make the deduction cheaper, more progressive, and more efficient, including some that could actually increase charitable giving.”
For example, all taxpayers could get a tax benefit even if they didn’t itemize. Or the deduction could be converted into a credit, which would be more valuable for all Americans. There are many ways to achieve a similar goal: establish equity and increase giving.
The leaders of organized philanthropy deserve credit for their stalwart efforts to urge the continuation of the charitable deduction in the face of calls for its restriction or repeal. The challenge, though, is to adapt to the changing times.
New elements of strategy may well be needed as the political pendulum swings in this precarious period of America’s “age of inequity.”
Telling lawmakers poignant stories of the good works supported by charity is important. But in the rough and tumble of federal budgeting sure to come in the days ahead, such accounts of the work of angels may fall far short of being sufficient.
Philanthropy’s traditional defense of the charitable deduction focuses emphatically on its societal value. And to many, it is a strong case indeed. But to others, particularly those searching for the necessary increase in federal revenues, there are strong counterarguments.
On Capitol Hill, lawmakers categorize the charitable deduction as a cost, a “tax expenditure,” in the parlance.
What we in philanthropy categorize as “gifts,” others categorize, somewhat menacingly, as “lost revenue.”
And a whopping total it is. Current estimates by the Joint Committee on Taxation put the “cost” to the U.S. treasury at a half-trillion dollars over the next 10 years. Even in Washington D.C., that’s a number that catches the eye.
In addition, critics of current policy can easily strengthen their case by striking a solidly populist posture. They point to the fact that the vast preponderance of people who benefit from the charitable deduction are America’s wealthiest.
The perverse fact, of course, is that wealthy taxpayers reaping disproportionate benefits is common throughout the tax code, not just when it comes to the charitable deduction.
But there is a danger in being drawn to its defense. For philanthropic leaders, there is real awkwardness in being seen as representative of just one more trade group with passionate arguments in favor of a pet deduction.
Warning signs are clearly on the horizon. Challengers to the current form of the charitable deduction are coming from different directions. Already there are persistent calls to limit the deduction only for causes that pass a litmus test of “social worthiness.” Food, yes; music, no.
Though such proposals are profoundly unwise and unworkable, nevertheless they can gain traction.
Other challengers come from a different starting point, adding the deduction’s uneven tax benefit to a list of grievances about America’s wealthiest 1 percent. This is particularly unfortunate given that America’s wealthiest includes enormously generous individuals and families who account for the lion’s share of personal charitable giving, as measured by total dollars.
The country can ill afford to discourage the giving of families whose financial support of a wide range of social, cultural, and environmental causes is more critically necessary today than ever before.
But the strategy for defending the charitable deduction would be stronger if more Americans benefited. After all, Medicare and Social Security are the least challenged benefits in society because so many voters get them. The same would be true of the charitable deduction if the benefits were more widespread.
Instead of guarding the barricades of the status quo, those looking to preserve the deduction could consider this tactic: spread the benefit, and strengthen the defense.
One can be drawn to the new lines of defense by the strategies of political warfare, by the principles of equity and fairness, or, dare it be suggested, by both.
But the picture is clear: If the answer is yes to the question “Is it worth defending?” then the time is now for a fresh approach. After all, the bumper stickers are already being printed: “Charitable Deduction: Fix It or Ditch It!”
Thomas Peters is chief executive of the Marin (Calif.) Community Foundation.
