Eliminating the charitable deduction: It’s the end of the world as we know it, and I feel fine

As governments at all levels scramble for resources, the idea of eliminating the charitable deduction from the income tax code has begun to attract support.  Many people who work in nonprofits say this would damage the sector, because people would be less inclined to give and those who did give would give less.  Let’s assume this is true (though Americans’ passion for voluntary organizations long predates the tax code; Tocqueville, anyone?).  Is the health of “the sector” really the relevant concern?

It may be that people will give less to their churches or alma maters or prestige arts organizations if deprived of a tax benefit for doing so.  But that money will be in the public treasury, where it will go for health care and education and environmental protection (and even a pittance for the arts).  So wouldn’t the goals of nonprofit hospitals and nonprofit schools and environmental nonprofits and arts nonprofits actually be advanced if the government had more to spend on these essential services?

In other words, as with health care, the question isn’t whether people pay; it’s how.  You either pay for health care by giving money to an insurance company, or by paying taxes and letting the government insure you. (The latter model, in use in this country only for the aged, produces the greatest efficiencies and greatest satisfaction among patients, families and caregivers; but of course extending it to the rest of the population would set us on the road to serfdom.  Hayek himself endorsed public provision of health care, so what are we arguing about, again?)

Likewise, you pay either way for education and schools and environmental protection and so on; it’s just a matter of which pot you’re anteing up in: the private nonprofit or the public.

So there’s a real discussion to be had about whether the charitable deduction is a good idea for the entire sector, or whether in fact social service and social justice nonprofits–-the ones that struggle the most for philanthropic support–-would be better off without deductions but with a bigger public fisc.

(Yes, the money might go for defense, or subsidies for oil companies, or some other boondoggle.  It’s our responsibility as citizens to prevent this; tax deductions were not designed to protect us from self-government.)

This is another version of the argument the Nonprofiteer has made elsewhere about the generosity of billionaires versus the reinstatement of a significant inheritance tax.  (We Democrats should make a point of calling it “the inheritance tax,” because that’s the whole point: at the moment, people who work for their money pay income taxes on it while people who inherit their money don’t.  Or we could call it “the windfall profits tax,” which is what it is: a tax on the windfall profits of people whose only contribution to society is having picked the right parents.  And the Nonprofiteer speaks as a windfall recipient.)

When the government collects inheritance taxes it can spend the money on things we as a democratic society think important: health and education and social services and, yes, roads and weapons systems and a bunch of other things about which the Nonprofiteer’s opinions are in the minority.  If the government doesn’t collect, billionaires’ offspring can spend the money on the things they as potentates think are important, which might be eradicating malaria and endowing charter schools but which might, yes, be paying scholars to produce support for the elimination of public education or the abolition of all regulation, or even paying legislators directly for said elimination and abolition.

The tax code is designed to provide the government with resources to do its job.  Its job, among other things, is to provide essential services to citizens who cannot provide those services for themselves; and the more money it collects, the more services it can provide.  What’s important is that those services get provided, not that they get provided by the sector that happens to employ the Nonprofiteer.

So the question here is not, “Is it good for the sector?” but “Is it good for social welfare and social justice?”  The answer is not clear-–crunching the numbers would be a huge job for which the Nonprofiteer is totally unqualified-–but let’s make sure we’re asking the right question.


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9 Responses to “Eliminating the charitable deduction: It’s the end of the world as we know it, and I feel fine”

  1. Darryl Evey Says:

    That is an excellent point. Most individuals who donate to small nonprofits are not looking for the tax break because the amount is small and they don’t itemize their deductions. Medium individual donors do not give to local agencies, they give to universities and hospitals. Large donors create foundations to manage their donations. Those donors will still see the same tax breaks. So, once again, any changes will have littl effect on lower income, no effect on the wealthy, and only hurt the upper middle class.

  2. Deborah Strauss Says:

    I’m not ready to agree with the Nonprofiteer in principle, but I won’t take her on. I do know (put me in any of the middle classes) that the deduction is meaningful in my giving–noble donor that I am. The thought that I’ll see some tax savings related to that check is comforting. Even if greater tax revenue will encourage increased government funding for things I care about, in the short terms, NPR is threatened.

    My personal donations are frequently to policy or advocacy organizations: ACLU, Friends of the Parks (Chicago), national environmental groups, etc. The Nonprofiteer’s argument is weaker here–in no case, even with the kind of government funding she and I would like to see, will we not need these groups to keep the government honest and push certain ideas?

    • Nonprofiteer Says:

      No dispute there–ACLU et al perform an essential function that government can’t, namely, policing itself. I suppose a better title for the posting would have been “Eliminating some part of the charitable deduction,” because my real target is gifts to Harvard’s endowment that could go to feeding people. But I’m absolutely aware that the choices are rarely that stark.

      I too value the deduction, but by hypothesis I’d need to give less, or to fewer things, if tax revenue were taking care of the social safety net.

  3. Jeff Leitner, Insight Labs Says:

    I can’t help but think that non-profits, both big and small, made a mistake in tying charity to tax breaks. Something sticks in my craw every time I see a year-end appeal based, not on the need or some intrinsic human value I’ll receive, but on the fact that the numbers on my 1040 will be different.

    Yes, people currently receive tax breaks. But it’s not the reason to buy a house, to go to school, to provide childcare or to seek medical attention. It should not be the appeal to help serve the common good.

    • Nonprofiteer Says:

      It’s certainly not the reason to do any of those things, but it may be the little extra nudge that enables people to make the decision to do them. That’s why it’s so important to decide whether the things for which we give tax breaks are truly the things we want to have happen. Do we really want people to build–and therefore, inevitably, buy–new housing on virgin farmland? Do we really want people to increase Grinnell’s endowment from $1B to $1.005B? And so on. But yet, charities should be making the case for giving to them–not for evading the legitimate demands of Uncle Sam.

  4. Anita Bernstein Says:

    I don’t see this puppy ever going away. You’re probably right that it’s unwise as policy, but there’s a huge collective action problem: Most people either benefit from the deduction or have good feelings toward at least one nonprofit that would suffer from repeal, while the detriments of tax-deductibility are dispersed.

    Although I have never inherited a nickel, I may have had my own windfall in the form of the home mortgage interest deduction. (I say “may” because the sale prices I paid were probably inflated by the existence of this little goodie.) Let’s repeal THAT. Or for heaven’s sake, at least rein it in by limiting it to one property per taxpayer.

    Deborah Strauss raises a good point: we the people need independent entities to keep an eye on our governments. Unless increasing home ownership has positive externalities (like making people more stable or law-abiding), which I doubt, we don’t need subsidies for the real estate business.

    • Nonprofiteer Says:

      I doubt either of the deductions will go away, but wanted to at least raise the question as something other than the self-interest of the sector. But I agree that the mortgage deduction is an even more egregious case of subsidies to wealthy people at the expense of the poor–especially for second homes!

  5. Wild Woman Fundraising » Blog Archive » Want some good reads? Here’s what I’ve been reading this week. » Wild Woman Fundraising Says:

    […] From the Question and Answer of the Nonprofiteer’s blog: Are we eliminating the charitable deduction? Should we be nervous? […]

  6. Kashish Mishra Says:

    I am totally agree with this article. But Diya Foundation is a social welfare and charitable society founded with the objective of propagating welfare of the underprivileged in the society with special emphasis on the welfare of slum children, handicapped, aged and destitute.

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