Kill Charity, Solve the Budget Crisis?

So, if you haven't noticed, Washington DC is absolutely mad now a-days. (Warning! NYTimes link! Not sure it's worth one of 20!) I don't know if it's the heat making our lawmakers set on economically ruining our nation, or just the normal bipartisan vitriol, but the last few months of budget talk keeps me coming back to the one point in the tax code I know enough about to blog: The charitable deduction.

Since getting into the funding side of nonprofits, I've been seeking out information on the efficacy of the charitable deduction in driving funding to nonprofits and, generally, spurring social change. My interest in this was piqued last December when I read this op-ed from the New York Times (sorry non-digital subscribers!), "It's Time to Re-Think the Charitable Deduction." The author, Richard Thaler of the University of Chicago, framed the charitable deduction in a different way than I've internalized:

Consider this scenario: Having decided that charitable giving is a worthy cause, the government subsidizes charitable gifts from certain households, and for those chosen to be part of the plan, every dollar donated to a charity is increased by a specified percentage. To qualify, taxpayers must have a substantial home mortgage; the subsidy rate increases with taxable income. Low-income taxpayers receive no subsidy, but donations from qualified high-income taxpayers are subsidized by as much as 40 percent — or more.

At this point, you may be wondering why I’d even mention something so preposterous. After all, why should a family’s eligibility for a donation subsidy depend on whether it has a large mortgage? And why should the government subsidize donations by the rich more than donations by the poor? The idea seems a nonstarter. And it would be, if not for one important detail: it is (approximately) the current law.

I was taught to reject anything coming out of the University of Chicago economics department, but I have to agree with Professor Thaler. Tax deductions and tax subsidies are essentially the same thing, when looking at government revenue. When the government writes off a charitable deduction, they are forfeiting earned revenue. Because the tax code is progressive, the wealthiest people are able to write off the most taxes with their donations, which means the government is forfeiting the most revenue from those donations--essentially subsidizing those donations more than someone in a lower tax bracket. The New York Times (sorry!) Economix blog has some excellent charts depicting these differences.

Additionally, many people who donate never see those tax write-offs anyways. I try to donate about five percent of my income to nonprofits each year, but I have never seen any tax benefit from my donations. I've never written them off because the amount I give is always less than the standard deduction (since five percent of what I make isn't that much), and since I don't have a mortgage, I don't have any real reason to do line-item deductions. I'm assuming many people who give are in my position as well.

This as an issue of democratic fairness alone is enough to warrant reform, but since it costs the government revenue, reform is more pertinent. The government could feasibly re-work the code to collect more revenue without decreasing charitable giving by much, or at all. This could close some substantial holes in the long-term budget.

But, I don't think this analysis of revenue gets at the full picture of the usefulness of the deduction as it relates to social change. Kelly Kleiman concluded in a recent Stanford Social Innovation Review post on this topic by saying: "[T]he 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...but let’s make sure we’re asking the right question."

The charitable deduction is justified by saying the money donated is going to solving social problems the government cannot tackle. This assumes that the government does not create social progress, which is an assumption I do not hold. I think the government can and does create social change and is an important player in the game. While there are issues with fairness regarding the charitable donation, and I think the deduction should be, at a minimum, fair, I think the more important issue is one of effectiveness.

There are clearly some things we need the nonprofit sector for, like advocacy, but there is no inherent reason to say that it cannot provide direct services, like health, to needy populations (see: Europe). If the government fully funded each nonprofit in the country (which it shouldn't), there would be no need for charitable donations in the first place. The Obama administration has created many innovative funding programs that have the potential to have significant lasting change at a broader scale than any foundation.

So, will re-working, or eliminating the charitable deduction solve the budget crisis and stop the madness in Washington? Definitely not. That is going to take way more changes than I know how to blog about. But, the charitable deduction needs to be re-thought and we all need to think a little bit harder about this foundation of the nonprofit sector. Does it make sense to write off donations? Should people give out of altruism and not financial benefit? Does diverting resources from the government hurt our cause more than it helps?

I have some thoughts on these, but I don't know. What do you think?