The Tax Man Cometh

On this April 15 many Americans are thinking about taxes. I too am thinking about taxes and how taxes and the proposed changes in tax law will impact the landscape of charitable giving. It has been proposed that the charitable deduction of gifts by individuals with adjusted gross incomes above $200,000 be capped at 28%, even though the same proposal would raise their federal tax rate above 39%. There has been a great deal of speculation about how that would impact giving, but let’s focus for just a moment on the facts of the matter.

According The Center of Philanthropy at Indiana University,

In 2006 (most recent year for which data is available):
2.9% of returns (~4 million) had AGI above $200,000
These 2.9% of returns constituted:
43.5% of all itemized charitable gifts claimed on individual tax returns.

(Note: this is thought to be an underestimate of their actual giving b/c a large share gives more than they can legally deduct in any given year.)

The authors and proponents of this plan have dismissed its impact on charities by pointing out that it would impact on a small number of people (only 2.9% of households). Mark Twain once said “First get your facts straights and then distort them,” and there is a bit of that going on here. While it is certainly true that 2.9% is a small proportion of the population – that small number are contributing nearly half of all money that is going to charities from individual donors – a fact that seems to be buried in all of the rhetoric.

The Center on Philanthropy estimated that had these tax proposals been in effect in 2006 (the last year for which full data is available) they would have resulted in a nearly $4 billion reduction in the amount given to charity by the top 2.9% of givers. In the world of Washington politics $4 billion may be a rounding error – but out here in the real world a $4 billion reduction in giving means many organizations cutting services, laying of staff and even closing their doors.

I don’t think this issue should be viewed from a “red state, blue state” perspective. It is about how much we as a nation need and value the non profit sector and the services it delivers and rather we really want a tax policy that diverts money from charities to the federal coffers. Because, if you look at it from that perspective, the real looser is the nonprofit sector – individuals can adjust their giving behavior so that they have the same “net income”, the government gets increased revenue from both higher tax rates and the spread between the 39% tax rate and the 28% deduction, but all of that comes out of the share that would otherwise have gone to charities.

Somehow generosity is being cast as some sort of tax shelter. Giving your money to worthwhile causes is not a tax avoidance strategy, it is one of the most humanitarian acts there is. In fact, the word philanthropy means “love of mankind”. So, rather than fill federal coffers with a tax policy that increases the burden on the generous and decreases the money going to charity. Perhaps we should create a tax policy that rewards the generous and taxes the stingy. Call it the “Scrooge Tax” – let the generous continue supporting charities and deducting their gifts and put a little “Scrooge Tax” on those who choose not to support the greater good. That seems like a win, win, win to me.

David King, President & CEO