The Problem with Charitable Giving
In yesterday’s NY Times, two physicians published a provocative op/ed regarding the inefficiency and regressivity of the charitable contribution deduction, particularly after the TCJA. Here are few excerpts:
We suspect that funding tuition at one expensive New York City medical school, constructing another cancer treatment center in a city already rich with them or building even more research capacity at one of the nation’s best-endowed universities is not at the top of most voters’ priority lists. It is, instead, mainly the very, very wealthy who pass on the costs of their causes. In 2016, half of all the tax dollars deducted as a result of charitable gifts in New York State were deducted by the top 0.5 percent of tax filers, who earned $1 million or more. The bottom 60 percent of tax filers were responsible for 5 percent. . . .
The wealthier the donor, the more taxpayers lose out. According to the Tax Policy Center, in 2017, a $1 donation from someone in the top 1 percent of earners reduced the government’s funds by 32 cents, while a $1 donation from someone in one of the bottom two income quintiles reduced it by less than 5 cents. This is because higher earners are in higher tax brackets, which means that giving them a pass on those taxes costs the country more. It is also because wealthy individuals often have appreciated stock that they can donate, which lets them avoid paying the capital gains taxes that they would otherwise owe if they cashed in on that stock themselves. Finally, you have to itemize deductions to get almost any reduction in taxes from giving. Nearly all wealthy people do so, but it’s rare among lower-income people. The new tax law will make it even rarer; the Tax Policy Center predicts that it will reduce the number of households that take the charitable deduction to 16 million from 37 million. Eliminating the tax deduction for charitable giving would not be politically viable. But we could limit it, either through lowering the cap on how much of a gift can be deducted or setting a flat percent of each donated dollar that can be used as a credit against one’s tax bill. We could also call on the philanthropists who are making these enormous contributions to voluntarily forgo the deduction. Many megawealthy individuals have followed Bill Gates’s and Warren Buffett’s lead and pledged to give away half of their accumulated wealth. Perhaps they could also pledge that through their funding of the causes they hold dear, they will neither reduce the ability of our government to fund its priorities, nor shift some of the cost of their gifts onto other taxpayers.
For more research on the predicted effect of the Tax Cut and Jobs Act on charitable giving, check out the Philanthropy Outlook 2018 – 2019 from the Lilly Family School of Philanthropy at IUPUI.
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