A reader writes:
My day job is as a nonprofit fundraiser. There has been a bit of hew and cry in the sector about the potential ending of the charitable deduction. But not from a lot of fundraisers. Frankly, most good fundraisers know that donors rarely give because of the tax benefit of doing so. They give because they care about the cause, whatever that may be. Also, most donors never reach the level one has to reach to actually itemize those donations and end up taking just the standard deduction. I've seen little data (and I'm happy to be proven incorrect on this) that the charitable deduction plays a particularly large role in driving charitable donations. Passion for and commitment to a cause nearly always trump it.
Another backs him up:
I could not agree more that the charitable deduction is one of the easy pieces to remove from the tax code. Before I became a tax lawyer, I worked in fundraising, and people simply do not give to charity for tax reasons (with some exceptions at the very richest level of people who set up personal trusts and such). If a person does give to charity for tax reasons, he is losing money.
A charitable donation is worth at most about a third of its dollar value. If you give $1000 to your charity of choice, and if you itemize, you can deduct that amount from your income. So if you had $50,000 in income, on your taxes, it looks like you made $49,000. You saved paying the tax on that $1000. The tax on $50,000 income for a single person for 2011 is $8,631; on $49,000 the tax is $8,381. The difference is $250. So you paid $1000 to charity for $250 in tax savings, which means you lost $750 on the deal. If you are giving to charity for tax reasons, you are losing money.
People do time their gifts for tax reasons. Many people give in December so they can get a deduction on that year's taxes, but that is just an issue of timing, not a reason for giving. Also, many poorer people do not take advantage of the charitable deduction because they do not itemize.
The same is true for the home mortgage interest deduction, by the way. This deduction does not affect whether you buy a house or not; it just affects how big a house you get. If you cannot afford a down payment or cannot get access to cheap credit, it does not matter how big the tax deduction is. On the other hand, if you can afford a house, you may push yourself to buy a little bigger because you know that you can deduct that cost. The people who take advantage of the HMID are by far the wealthiest Americans because they can afford down payments and have access to credit. Meanwhile, poor and middle-income taxpayers are unable to deduct rental payments that often amount to a dollar figure greater than the standard deduction. So basically renters are subsidizing buyers, and there is no real evidence that home ownership has increased because of it. There was a good paper discussing HMID reforms issued by the Urban Institute in 2010 that is worth a read (pdf).
These are two important deductions that should disappear. I just fear there is not enough political will for it.
Another zooms out:
Living in Singapore and being directly engaged with the Non-Profit community, I can't tell you how much a difference the US charity model makes – particularly when it comes to giving to charities that are "international" (i.e. the environmental groups, social groups, and other NGOs that are doing some great work around the globe.)
The Government of Singapore is at a loss when it comes to dealing with some very fundamental and threatening problems – for example, the burning of the rainforest and peatlands in Sumatra and Borneo that routinely sends a toxic haze over the island. Indonesia is unwilling to engage in discussions with Singapore directly, as what is an environmental issue for Singapore is a societal development issue for the Indonesian side (much of the clearing and burning is done by smallholder farmers and rural communities). Singapore also only permits tax deductions on charitable giving that directly benefits Singaporeans (i.e. giving to a hospital for the blind or orphanage). You can give money away to groups to stop the burning, but there's no tax incentive to do so.
If Singapore reformed its tax code to allow for international charitable giving, there's no doubt that some of the money would be spent on projects which tenuously, at best, benefit Singaporeans. But a significant amount of funding from Singaporean citizens would be available for sustainable development work (i.e. training in better land management practices, sustainable agroforestry, etc.) to help stop the burning. The lack of haze would certainly be a benefit to Singapore as a country, as would the changed perspective of Indonesians. Singaporeans would be benefiting the local Indonesians, without the meddling interference of diplomats, increasing the island's profile without any risk to the government.
Of course, the lost tax revenue probably makes this a non-starter for the most part, but it emphasizes again to me how much of a difference American charity can make when it's not explicitly driven by government interests. According to the Wall Street Journal, Americans gave nearly $9 billion to international charitable work in 2009. In contrast, USAID's top four benefiting countries in FY2010/11 were Afghanistan, Pakistan, Haiti (earthquake), and Israel totally accounting for about $5.4 billion. Which monies do you think did the most good, and were most effectively spent? Particularly with the whole Philanthropy 2.0 movement, which ensures a maximum amount of donor oversight on funds spent?
While I would never argue that US should slash its international assistance programs (Reform? Of course. Israel is a first-world country), we should never underestimate the amount of good that Americans are doing abroad. By not only staying out of the way, but providing incentives, the US government is doing itself and the world a great favor.
The Dish 