Currently there is a scandal over the IRS targeting of Tea Party groups for investigation of whether they qualify for their tax exempt status or whether they are primarily political. The main issue at stake is whether the groups can get tax deductible contributions or not. That is the main advantage of tax exempt status. Making charitable contributions is a popular tax deduction on both the left (e.g. Yglesias) and the right (e.g. Heritage Institute). But only about 30% of Americans itemize their deductions at all, so this is a benefit that mainly affects the elites of society rather than the median.
The position of medianism.org is that if a policy benefits people above the median and has no clear benefit to the median, then it should be scrapped. This is a tax deduction that mostly benefits households earning above the median. The idea of the deduction is that it will encourage more charity, but even proponents like Heritage acknowledge that it has little effect. According to the Indiana University School of Philanthropy, charitable tax deduction has very little impact on charitable giving (pdf) among the 30% of Americans who are eligible to get it. They say that Obama’s proposal to lower the deduction on charitable giving would only reduce charitable giving by 1.3% among the 30% of Americans who itemize and it would have no effect on giving by the other 70% of Americans. In contrast, they point out that the 2008 recession reduced charitable giving by 13% despite the much greater need due to increased poverty during this time. I would go further than Obama’s proposal and scrap the deduction, but even Obama’s proposal was politically untenable.
CATO’s Daniel J. Mitchel also proposed scrapping the charitable deduction because,
there’s just no evidence that the tax break leads people to increase their giving… Over the decades, there have been major changes in tax rates and thus major changes in the tax treatment of charitable contributions. At some points, there has been a big tax advantage to giving, at others much less. Yet charitable giving tends to hover around 2% of U.S. gross domestic product, no matter what the incentive.
Another reason to drop the deduction is that it’s exclusive—and it gives a break to people who really don’t need one. Upper-income households are the biggest beneficiaries of the deduction, with those making more than $100,000 per year taking 81% of the deduction even though they account for just 13.5% of all U.S. tax returns. The data are even more skewed for households with more than $200,000 of income. They account for fewer than 3% of all tax returns, yet they take 55% of all charitable deductions.
The charitable deduction should also be scrapped to avoid the problems with distinguishing between Tea Party (or Occupy) organizations whose “primary activity” is social welfare and organizations whose primary activity is political. Political work is not tax deductible whereas social welfare work is. The current IRS scandal is a real issue, but it will always be a difficult problem as long as the government allows deductions for social welfare and not political activity. The issue could be eliminated forever by simply eliminating this tax benefit for the elite.
The Alliance for Charitable Reform claims that the tax deduction encourages, “a selfless act” that benefits “those in need.” But very little of the money actually goes for “basic needs”. According to the 2010 Study of High Net Worth Philanthropy (pdf – Table 4), in 2009, basic needs was the lowest priority expenditure for the people who get the most benefit from the tax deduction.
It turns out that high-income people care a lot more about the arts and elite educational institutions like the Ivy League, than they care about giving to people in need. In comparison, Figure 20 of the same study indicates that basic needs is probably the second highest priority for the median American donor after religious contributions.
1. Here’s a list of benefits for donors making gifts to the Metropolitan Opera, which include backstage tours, ticket priority, invitations to dress rehearsals, free publications, guest passes, etc. (HT: M. Smith in the comments.)
2. According to Bloomberg, thousands of college football and basketball fans get a tax break on donations they make as a condition for buying season tickets. Many universities demand hundreds or thousands of dollars in donations as a condition for buying tickets at face value.
I do like charity and I would like to increase it, but if we are going to keep the deduction, it must be reformed along medianist lines and here are a couple medianist ways to reform the charitable tax deduction:
1. Extend the deduction to the entire population. If it is good for high income earners, then it is good for low income earners too. One problem with this is that it raises the transactions costs of keeping track of a lot of small donations, but we live in the information age where every sale of bubble gum pays sales tax, so it is feasible if it were a priority. The deduction does not impact most Americans and it should at least benefit the half down to at least the median if it is to be considered medianist. But why not just extend it to all American charitable donations? The organizations that are fighting to preserve the deduction for elites (like the Alliance for Charitable Reform) do not seem to care about extending it to everyone else.
2. Define charitable organization along medianist lines. They are supposed to engage in activities that increase the “social welfare.” Harvard University is defined as a tax-deductible charitable organization and received total gifts of $650 million in 2012. Do these donations enhance the social welfare? They benefit the elites, but they benefit only very few Americans at or below the median. In order to qualify as increasing the “social welfare,” the majority of the funding should benefit people who are at or below the median American. That medianist requirement would revolutionize charity in America and help avoid the sort of scandal that the IRS is currently involved in. It would give the IRS some guidance for judging whether an organization is serving the “social welfare” or not. Currently, the “social welfare” is so vaguely defined that it is easy to get in political trouble investigating a political organization. At least this way political organizations would have to try to claim that they are working for the average American before they can get the deduction. Even if they only pay lip service to the social welfare, it would still be a good exercise for organizations to think more about what their mission really is.