Ending the charitable tax deductions present in the U.S. tax code would drastically alter the contours of today’s ever-growing nonprofit industry. Considering the nonprofit sector accounts for 5.5 percent of GDP and nearly 10 percent of all wages and salaries paid in the United States, a structural change such as ending charitable tax deductions would have significant consequences to both donors and recipients of charitable giving.
This third rail of philanthropic policy has been standard practice for nearly a century. According to the Joint Committee on Taxation, the origin of the deduction dates back to the 1917 War Revenue Act. Although the deduction has changed substantially in its detail since its introduction, its founding principle has remained unwavering. To quote the JCT at length:
Supporters of the deduction . . . argued that the incidence of any income tax without the deduction would fall at least partially on the charities themselves, as individuals would donate only the after-tax value of their before-tax intended gifts. Additionally, the deduction was viewed as an effective way to distribute public money to charities, as it cut out the government middlemen. Many believed charities could deliver social services better than the government and that it was appropriate for individuals rather than the government to decide which charities to support. Finally, some argued that money donated to charity should not be considered income at all, and thus should not be taxed.
Although the charitable deduction has offered a meaningful crossroads between public policy and nonprofit fundraising for generations, it has not been without its critics. In 1997, there was a popular debate on this very topic following the publication of a Council on Foundations and Independent Sector report titled, “The Impact of Tax Restructuring on Tax-Exempt Organizations,” which concluded that Americans give because of the tax write-off (and, without the deduction, nonprofits would flounder). Then at the Cato Institute, Stephen Moore responded that tax reforms without the charitable tax deduction would actually “raise the level of charitable giving.” A cover story from Philanthropy also doubted the report’s conclusions, but instead forwarded a compromised solution – tax reform with a charitable deduction option.
The most recent foray against the deduction has taken an entirely different form – absent attacks on particular tax reforms or challenges to specific economic models. Writing in Commonweal magazine (which is “edited by Catholic laypeople” and “has staked a claim for Catholic principles and perspective in American life”), law professor Fran Quigley forwarded the latest attack in “The Limits of Philanthropy: Time to End the Charitable Tax Deduction.” Appealing to the virtue of “justice” in the American experiment, Quigley’s argument in a nutshell is that private generosity has fallen short of its task and, without the charitable tax deduction, more money could be used “for public programs that help the poor.” (I, of course, do not wish to gloss over the nuances of Mr. Quigley’s argument. Be sure to read the piece here for a fuller explication.)
The article’s assumption that funds would simply be moved from the “inefficient” private nonprofit sector to the more “efficient” public government programs[i] is flawed for a number of reasons. First, for argument’s sake, if we accept the premise that getting rid of the charitable tax deduction would, in fact, increase public revenue, there is no reason to necessarily believe this revenue would be forwarded to safety net programs like Medicaid or TANF. In 2014, there were an estimated $51.6 billion of charitable tax deductions. This figure is less than 5 percent of last month’s $1.1 trillion “Cromnibus.” While plausible that the money could be redirected to welfare programs, it is certainly not definite given the countless other programs and expenditures by the federal government.
Second, the idea that government programs are more efficient than those in the private sector depends greatly on how one measures “efficiency.” If we look at efficiency in terms of dollars, government’s poor performance is astounding. To point to Quigley’s example of TANF, one must only look at the government’s own audit reports. For example, according to an audit by the Inspector General, 21 percent of federal dollars spent on TANF in Ohio (2006-7) were improper (meaning funds went to ineligible families, payments were duplicates, payments were calculated improperly, or documentation was not filed properly). In Michigan, there were 24.3 percent improper payments. In New York, the improper payment rate was 28.5 percent.[ii] And the list goes on. While I do not mean to suggest that by comparison every dollar in private charity is spent properly and efficiently, I doubt whether a benefactor would continue to support a program where 0.25 for every $1.00 is entirely wasted. While the taxpayer does not have an immediate choice (apart from the democratic process, of course), donors to philanthropy can hold nonprofits to rigorous standards of efficiency without the stranglehold of bureaucratic red tape.
One of my favorite lines in Quigley’s piece (which I am admittedly taking out of context; the line is originally saying how the label “charity” applies to many organizations that fail to benefit the poor) was: “Many Americans don’t know the difference between tithing and almsgiving, and neither does the IRS.” Yet, the great irony of the piece’s argument is that some governmental organization (like the IRS) would be thrust into the position of discerning tithing from almsgiving. Be it through legislative, executive, or bureaucratic action, the article’s entire solution depends on creating a governmental apparatus that determines the legitimacy of almsgiving. Considering the recent allegations of IRS targeting explored by the House Committee on Oversight and Government, it is worth questioning whether the IRS should ever be in the position of "allocating justice."
Lastly, the article points to the “disastrously implemented” relief efforts by nongovernmental organizations following the 2010 earthquake in Haiti as a case presenting the flaws of nonprofit work. Although in this case the author was responding to an op-ed that introduced the Haiti case as a model for the deduction, it appears to be an overall poor example. The crux of the Commonweal article points to the inadequacy of philanthropy’s “safety net” and highlights the paramount issue of poverty to evidence the argument. In fact, the article even argues that charitable organizations are not as effective at “solving structural economic problems.” The Haiti example certainly tells us something about emergency and natural disaster spending, but it seems mute on issues of structural inequality – an important distinction.
My criticism of the Commonweal article is not meant as a defense of the charitable tax deduction. Rather, if I am taking a position at all, it is instead a tacit agreement with the revocation of the deduction. Although public discourse continues to flirt with this idea, the advantage of removing the deduction is not to benefit government; instead, it reverses the culture of nonprofit dependency on government facilitated by the charitable tax deduction.
If this conversation continues forward, it should not crowd out nonprofit charity, but instead shall make room for what Tocqueville called the American propensity to “found seminaries, build churches, distribute books, and send missionaries.”
Who would you rather knocking on your door asking for help: your neighbor or your neighborhood IRS agent?
[i] e.g., Quigley writes, “Despite being chronically underfunded, such programs are more efficient than charity programs designed to help the same groups of people.”
[ii] h/t http://www.downsizinggovernment.org/hhs/welfare-spending#_edn46