The Limits of Philanthropy

Time to End the Charitable Tax Deduction

When I worked for our local legal services program here in Indiana, we often represented clients who had profound disabilities or severe illnesses but were unable to obtain the medicine and care they had been prescribed. Our state government provides very limited access to Medicaid, so these clients’ applications were routinely rejected. Once, when one of my colleagues helped a client file an appeal of such a decision, he groaned when the case was assigned to a judge who was known for his outspoken contempt for “welfare.” After listening to a full hour of evidence about the woman’s chronic pain and her struggles to afford medication and therapy, the judge promptly denied her request for Medicaid coverage. The woman left the courtroom in tears. Her lawyer started packing up his files. The judge lingered for a moment, and broke from his stoic demeanor. “It really is too bad what she is going through,” he said to my colleague. “Isn’t there some kind of program out there to help people like her?” The judge meant a charity program, and the answer was no. The woman was in need of years of assistance with expensive health care, not to mention housing and food. Every free-clinic director or shelter staffer I have ever known would be the first to insist that his or her efforts are no substitute for a reliable social-safety net or a job with a living wage. But that judge is just one of many people who assume that there must be a “program out there,” a charity that will come to the rescue of whoever needs rescuing.

It turns out this is a peculiarly American illusion. Most other rich countries devote far more government funding to programs that meet social needs; they do not expect charity to replace state assistance. The United States spends only about 20 percent of its gross domestic product on government assistance with essentials like health care, food, and housing, while Germany, for example, spends 25 percent. Even the United Kingdom, after decades of Thatcherism under both the Tory Party and “New Labour,” spends almost 24 percent. Over the past seventy years—beginning with the Universal Declaration of Human Rights, followed by the adoption of the International Covenant on Social, Economic, and Cultural Rights—much of the world has embraced the idea that basic life necessities are a human right. Today, many countries officially recognize the rights to food, housing, and health care in their constitutions. But Americans largely shun what we call not rights, but “entitlements”; and the United States has refused to ratify the social and economic rights covenant.

It is not that Americans are hardhearted. We give more in private donations than the citizens of other rich nations. On average, Americans donate nearly 2 percent of our overall income to nonprofit organizations, and more than 80 percent of all U.S. households report making such donations. As a result, nonprofits are a big part of our culture and our economy. Not only do we count on them to meet many social needs that in other countries are provided by the state; nonprofit organizations employ one in every ten members of the U.S. workforce.

Nor is this a new thing. In the early nineteenth century, Alexis de Tocqueville wrote admiringly about the eagerness of Americans to form voluntary organizations. In the years since, our country has developed a loose network of thousands of individual charities funded by tax-deductible donations. We Americans get to vote with our wallets on what kind of support we want to offer the poor, an arrangement that suits our individualism as well our suspicion of bureaucracy. Applause for charity and volunteerism is a staple of U.S. political rhetoric across the ideological spectrum. President George H. W. Bush had his “Thousand Points of Light”; Barack Obama promotes “United We Serve.” In 1981, Ronald Reagan explicitly justified a cut in government social spending by appealing to Americans’ preference for voluntary charity: “The truth is that we’ve let government take away many things we once considered were really ours to do voluntarily out of the goodness of our hearts and a sense of community pride. I believe many of you want to do those things again.”

The private generosity of Americans, impressive though it is, does not meet the needs of America’s poor. Despite our overall wealth, we have higher poverty rates than most other developed countries, and millions of Americans lack access to health care and safe, affordable housing. Even when charitable organizations aim their resources directly at these challenges, they tend to be more effective at responding to emergencies than at solving structural economic problems. When, content with charity, we do not heed the call to justice—a call that echoes from Old Testament prophets to St. Augustine to modern-day popes—soup kitchens and short-term homeless shelters proliferate, while long-term nutrition assistance and housing support are scarce.

In her 1998 book Sweet Charity?, the sociologist Janet Poppendieck examined the new food pantries and soup kitchens that sprang up in the 1990s as federal anti-poverty programs were being scaled back. While praising the many dedicated providers she encountered in her research, Poppendieck pointed out that recipients of charity often feel demeaned, even in settings where volunteers and donors try to minimize the unavoidable hierarchy of benevolence. As any mother forced to line up for help from the community food pantry can tell you, it truly is better to give than to receive.

Poppendieck also points out a more serious problem with our preference for charity over public welfare programs. “The growth of kindness and the decline in justice are intimately interrelated,” Poppendieck writes. “This massive charitable endeavor serves to relieve pressure for more fundamental solutions.” Poppendieck extends the metaphor to argue that broad participation in—and awareness of—charitable efforts act as a “moral safety valve.” Participating in a walk-a-thon for the homeless or donating a box of macaroni and cheese to a food drive may keep us from confronting the underlying injustice of a society where great wealth exists alongside grinding poverty. Charity may not be very effective at alleviating long-term poverty, but it is quite good at relieving our sense of guilt about it.

 

AMERICA'S RELIANCE ON CHARITABLE organizations to make up for an inadequate safety net is reinforced by the tax code. Since 1917, U.S. law has allowed individuals, corporations, and estates to deduct as much as half their annual taxable income in an amount equal to charitable gifts made to qualified nonprofit organizations. Every dollar in charitable contributions reduces the tax obligation of the richest Americans by nearly 40 cents. The 501(c)(3) organizations that are eligible to receive tax-deductible gifts include charitable, religious, educational, and sports groups, among others. No other developed nation offers such a generous tax deduction for charitable giving.

One obvious effect of this policy is a loss of revenue. For 2014, the U.S. Treasury estimates the cost of charitable tax deductions will be $51.6 billion, an amount more than three times the annual federal budget for the Temporary Assistance to Needy Families (TANF). The deduction effectively transfers resources from public programs to charities. By doing so, it also transfers decision-making power from democratically elected governments to individual donors. Obviously, those who can afford to give the most have the most control over how charitable organizations spend their money. This results in what has sometimes been referred to as a “plutocratic bias” in the nonprofit sector. This bias is exacerbated by two characteristics of the charitable tax deduction. First, the majority of low- and middle-income Americans file their taxes without itemizing deductions, which means they get no tax benefit for their charitable donations. Second, even the minority of nonwealthy donors who do claim charitable tax deductions benefit less than wealthy donors because their tax rate is lower. Not surprisingly, three-quarters of the money U.S. taxpayers save through charitable deductions goes to people with incomes over $500,000, even though the charitable donations of this income group amount to just a little more than half of all charitable gifts. By contrast, U.S. taxpayers with incomes under $50,000 gave 20 percent of all charitable donations but received only 5 percent of the tax savings.

The nonprofit sector is not just profoundly undemocratic; a lot of it is not even intended to help those most in need. Donations to college football teams, opera companies, and rare-bird sanctuaries are eligible for the same tax deduction as a donation to a homeless shelter. Historically, high-income donors have demonstrated a preference for donating to higher education, health research, and the arts. Overall, most of the money donated by Americans goes to local churches and other religious organizations, and only about 5 percent of that money is spent on social services. Many Americans don’t know the difference between tithing and almsgiving, and neither does the IRS.

Despite the impressive amount of money Americans donate every year, only a little of this “charity” has the effect of transferring resources from the rich to the poor. Indeed, some tax-deductible donations, such as gifts to foundations that support wealthy school districts, actually increase inequality. This is especially discouraging when one considers that the tax deduction for a donation to an institution that serves the wealthy is money that could have been spent on proven government-assistance programs like food stamps, unemployment compensation, and housing assistance. Despite being chronically underfunded, such programs are more efficient than charity programs designed to help the same groups of people. Together, these government programs are credited with lifting more than 40 million people out of poverty each year. Needless to say, they could do much more if they had some or all of the money the government currently loses through tax deductions for charitable donations. And much more needs to be done.

When President Obama proposed a cap on charitable deductions in 2012, others took the opportunity to push further. Citing the unequal benefits the deduction provides to wealthy donors, Cato Institute senior fellow Daniel Mitchell argued in the Wall Street Journal that high-income Americans can afford to forego the deduction, and are often already rewarded for their generosity with premium seats at the symphony or named university buildings. Making a similar argument, the Economist quoted William Gladstone, who in 1863 told the House of Commons that the working class should not have to pay higher taxes so that the wealthy could receive a deduction for a gift that had already brought them “credit and notoriety.”

Getting rid of the charitable tax deduction would mean billions of dollars in increased revenue each year. It would also help dispel the illusion that discretionary charity from the excess accumulated by our nation’s wealthiest citizens constitutes an effective and adequate response to hunger, homelessness, and illness. It is time to shut off the moral safety valve.

During the brief 2012 debate over Obama’s proposal to cap charitable deductions—a debate Obama lost—a lobbyist for the nonprofit sector defended the deduction in another Wall Street Journal op-ed. As an illustration of the deduction’s utility, she cited the Congressional extension of allowable deductions for donations made in response to Haiti’s devastating earthquake of January 2010. That law did encourage private donations; in the end, nearly half of all U.S. households donated to Haitian relief efforts. But those efforts on the part of nongovernmental organizations were disastrously implemented. The characteristic flaws of NGO responses to large-scale national emergencies—a lack of coordination among hundreds of separate groups, the elevation of donor interests and nonprofit visibility over the needs of those to be served—are still on full display in Port-au-Prince today.

 

I DON'T MEAN TO SUGGEST that the nonprofit sector isn’t valuable. Acts of personal generosity can and should supplement a broad system that guarantees each individual her right to the essentials of life. Small-scale charitable programs can provide valuable examples of innovation, developing methods that may later improve the comprehensive public systems that address social needs. Volunteer work can provide important firsthand exposure to the sufferings of the poor. The people who stock food pantry shelves are likely to be the same people who campaign for federally funded anti-hunger programs. Bill Gates’s experience as a philanthropist eventually turned him into a champion of government-funded health programs and tax equity.

In any case, getting rid of the charitable tax deduction would not doom the U.S. nonprofit sector. Historically, the number and size of donations appear to be tied more to increases in pretax wealth than to the tax code. Many middle-class donors wouldn’t be affected at all, since they don’t itemize their donations. And while some surveys quote rich donors who say they would donate less money if the tax deduction was decreased or eliminated, the same surveys and other research suggest that this may not be true. It turns out that the same intrinsic rewards that motivate Americans to volunteer, such as the desire to give back to the community and to set an example for others, are also what inspire large donations. Along with the prospect of public recognition, these incentives have a far greater impact on giving than tax policies do. One of this country’s most generous philanthropists, Warren Buffett, has said that tax implications are mostly irrelevant to the charity decisions of the very wealthy.

Still, it would be naïve to pretend that eliminating the deduction would have no impact on the nonprofit sector, including some charities associated with the Catholic faith. But as long as it meant more money for public programs that help the poor, it would be worth the tradeoff. After all, charitable organizations don’t exist for their own sake; they exist to provide a service. If it can be provided more effectively and comprehensively by government agencies, then it should be. To say otherwise is to be either sentimental about nonprofits or irrationally disdainful of government. It may be time for charity to take a step back, so that justice can take a step forward.

Published in the January 23, 2015 issue: 

Fran Quigley is clinical professor and director of the Health and Human Rights Clinic at Indiana University McKinney School of Law and author of If We Can Win Here: The New Front Lines of the Labor Movement (Cornell University Press, April 2015).

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