Taxes Part 2: Proposals to Eliminate or Reduce the Charitable Gift Deduction

Various proposals are swirling around Capitol Hill to dramatically alter the tax code. A number of these proposals include a complete elimination or significant reduction of the charitable gift deduction. While no formal legislation has been introduced so far, Capitol Hill watchers fully anticipate such legislation sometime this year. Therefore, the nonprofit sector needs to get informed now and develop a strategy for advocating for the position it adopts.

There are two particular proposals that have received a fair amount of media coverage:

  1. Elimination of the charitable gift deduction along with virtually all other tax deductions.
  2. Effective reduction of the charitable gift deduction by allowing deductions for philanthropy in excess of 2% of gross adjusted income. The deduction would be available to all tax filers and, depending on the proposal, might be capped.

Would either of these proposals negatively impact philanthropy?

Some people assert there would not be a negative impact. These people cite research that reveals that most donors are not particularly motivated by tax avoidance. They also point out that philanthropy was alive and well in the U.S. long before there were charitable giving incentives or, for that matter, an income tax. These people also observe that, since records have been kept, charitable giving has always been about 2% of Gross Domestic Product (1.7% – 2.3%) regardless of the tax policies adopted by Congress.

By contrast, a Bank of America study conducted by the Center on Philanthropy at Indiana University found that 48.3% of wealthy Americans would reduce charitable giving if the gift deduction were eliminated. Of the wealthy American surveyed, 19% said they would dramatically reduce giving. For the survey, “wealthy Americans” were defined as those with an annual income of at least $200,000 and/or $1 million in non-residential assets.

While there are contradictory views on the subject and even research reports that appear contradictory, an anticipated university-drafted white paper is expected to find that philanthropy would be negatively impacted by elimination of or a significant reduction in the charitable gift deduction.

If people experience an increased tax burden, they will have less disposable income with which to make a current cash contribution. Elimination or reduction of various tax deductions would contribute to an increased tax burden for people. Therefore, individual philanthropy would be negatively impacted.

Some have suggested that such damage might occur but would only be short lived as the nonprofit sector would respond with enhanced fundraising efforts. But, such thinking is purely speculative. Between 2007 and 2009, individual giving (adjusted for inflation) has dropped 5.7%. Nonprofit organizations are already suffering and already scrambling for resources. The people who depend on the services provided by the nonprofit sector are already suffering. Do we really want to hurt more people, more severely just to light a possible fire under the feet of development professionals?

Elimination or reduction of the charitable giving tax deduction will negatively impact individual giving. This negative impact will be on top of the negative impact the sector will feel when the individual tax burden is increased. Nonprofit organizations, which provide vital services to our society, should not have to take the double hit.

That’s what Michael Rosen Says… What do you say?

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4 Responses to “Taxes Part 2: Proposals to Eliminate or Reduce the Charitable Gift Deduction”

  1. Says I, your first two hack jobs are a really brutally dishonest portrayal of both the importance of, and methods for, changing the tax code, including charitable giving deductions.
    In terms of yesterday’s claim of “insidious” and “cynical” “attacks”, I call “bull,” “bull,” and “bull!” At its core, the U.S. Tax Code is supposed to equitably distribute the legitimate costs the government incurs by providing for the public good. While we can (and should) debate what falls within the scope of the public good, how much that should cost, and what constitutes an equitable distribution, there’s really no argument for suggesting that the way it’s currently set up is irreparably damaged.
    It’s not at all “cynical” to say that we should streamline the system and be honest with people about what their true share of the cost is. It’s not at all “insidious” to suggest that the way to fill a $1 TRILLION/year deficit is to increase taxes while decreasing spending. And it’s certainly not an “attack” to suggest that we can only accomplish major change if we look at all ideas, not just the ones that have no arguments against them.
    There are many current individual tax credits which ostensibly reward contribution to the public good, though the true contribution is questionable (whether that’s owning a house, driving an alt-fuel vehicle, or giving to charity). There is no reasonable argument that my tithe to my house of worship enhances the public good… but I get a deduction for it. The rampant explosion of tax-avoidance scams – which we in the sector generously call “giving vehicles” – in the last two decades certainly mean that the wealthy can claim significant tax benefit from stashing their money in a DAF or family foundation, or other institution whose primary function is to employ CPAs, attorneys and, yes, CFREs, for theoretical future societal benefit. It’s not an attack on the sector to question what the tax credits are supposed to accomplish and whether they actually achieve those results.
    It’s certainly disingenuous to reference the decreases in charitable giving from 2007-09 given the huge economic disruption in that time period, and the fact that all early indicators are that 2010 started to move the arrow back up. It’s at best intellectually questionable to rely on a survey commissioned by an institution – and executed by another with an even stronger – vested interest in the status quo (in particular a survey where respondents have a strong incentive to give a specific set of answers). And it’s just poor writing to finish with a paragraph full of wild hypotheses state as fact.

    You did ask what I thought…

    • David, believe it or not, I do appreciate the fact that you have shared your thoughts. Dialogue is important to our democracy, especially dialogue with those with whom we disagree. Thank you for taking the time to engage. I just wish you had avoided personal insults which only serve to diminish your arguments and the quality of the dialogue. In any event, allow me to respond to your points.

      I take exception to your characterization of my posts. I have presented the facts. You may not like the way I presented the facts, and you may not like the facts. However, the facts are what the facts are. You have done nothing in your response to refute a single fact in either of my posts. So, I thank you for actually validating my posts.

      You also took issue with my use of the terms “insidious,” “cynical,” and “attacks.” The Federal Government is seriously considering eliminating the charitable gift deduction which many say could negatively impact philanthropy. One could sugar-coat this, but it is an “attack” on the current system that, if successful, could cause great harm to the beneficiaries of the services that nonprofits provide. As for my use of the other two words, I actually do not disagree with you. Unfortunately, you misunderstood my point. What I am calling “cynical” and “insidious” is not the policy that the Federal Government is considering. What is cynical and insidious is the way the Federal Government is posturing on the issue. If our elected officials would simply come out and tell us that they want to increase the tax burden for everyone, I would applaud their honesty. But, I’m not hearing many of them come out and say that. Instead, they are hiding behind concepts such as “fairness” instead of just saying they’re going to eliminate deductions in order to raise more tax revenue. And, they are also hiding behind the concept of “lowering tax rates” when they know full well that the proposal would result in a tax-increase for most folks. You wrote, “It’s not at all “cynical” to say that we should streamline the system and be honest with people about what their true share of the cost is.” I could not agree with you more. Unfortunately, I don’t feel our elected officials are being honest with us on this count; I wish they would be.

      You accused me of being “disingenuous” for referencing the decreases in charitable giving from 2007-09. I only referenced the decrease to point out that the sector is already suffering thereby making it more difficult for the sector to absorb another downturn in philanthropy that would likely result from the elimination of the chartiable gift deduction.

      You also take me to task for citing the Bank of America study while you impugned the reputation of the Center on Philanthropy at Indiana University which conducted the study. First, the Center is the premier research institution in the philanthropic field. They did not deserve your groundless accusation of bias. Second, you did not offer any evidence (i.e.: an alternative survey) that contradicts the findings. Just because you don’t like the findings of a study does not mean the study was wrong.

      By the way, I did acknowledge that the research in this area is sometimes contradictory. I also offered the other point of view that changes in tax policy have had little historic impact on philanthropy and, therefore, might not; I did cite the giving figures as a percent of GDP since WWII. I actually did more to present evidence on the other side than you did.

      While there is much we don’t know concerning the possible impact of the various tax reform proposals, a consensus in the research and professional communities is that the proposals will indeed negatively impact philanthropy. You suggest that that might be an acceptable price to pay in order to achieve tax fairness and deficit reduction. Finally, you made a point worth debating.

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