President's Perspective: Give and Take

By John Lippincott

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Do donors make charitable contributions in order to gain tax benefits? No. Do tax benefits influence donor behavior? Yes.

This seeming contradiction requires some explanation, especially as the U.S. Congress and legislatures in other nations contemplate changes to the tax treatment of philanthropy.

Charitable giving is a voluntary act, driven by a desire to do good, to have impact, and to give back. Donors are inspired by compelling stories, by exciting opportunities, by the chance to turn possibilities into realities. They view the act of giving as transformational, not transactional.

So when donors are asked on surveys if they give for tax purposes, they click "no." If their motivation was purely to save on taxes, a clever accountant could find better ways for them to hold onto their money other than by giving it away.

Why then provide incentives for philanthropy within the tax code? Quite simply, while those incentives do not motivate giving, they accelerate giving. Donors—and here we are talking primarily about major donors—will determine the size and timing of their gifts, at least in part, based on tax considerations.

Smart policy

That a tax benefit spurs giving is no surprise. Major donors are usually smart with their money, and they want to be smart with their philanthropy. Whether it takes the form of the charitable deduction in the United States or Gift Aid in the U.K., a tax incentive allows the donor to give at a lower cost. For many donors, that means they will give more and more often.

The influence of tax incentives is borne out by historical data on giving in the United States. Generally, the growth (or decline) in charitable donations each year correlates strongly with the growth (or decline) in the stock market and the gross domestic product. However, there are anomalous years, and those are precisely the years when changes occurred in the tax treatment of donations.

So that seeming contradiction—donors don't give because of tax breaks but tax breaks do influence donors—is not a contradiction at all. What is a contradiction, a glaring one at that, is for lawmakers to cut funding for educational institutions, expect them to increase their philanthropic support, and then call for reductions in tax incentives for philanthropy.

Ironic and foolhardy

As of this writing, the charitable deduction in the United States faces an uncertain fate in the halls of Congress. Some deficit hawks have called for eliminating the deduction entirely; others advocate capping it significantly below current levels. And many of those same legislators want to eliminate or reduce government funding for education, including student financial aid.

Not only would reducing tax incentives be contradictory to the goal of increasing philanthropy, it would be ironic and foolhardy. The irony is that in recent years, other countries have been adopting the U.S. model of charitable deductions in order to increase donations to their educational institutions. Indeed, some countries, such as France, have created programs that are far more generous than the United States' in the benefit to donors.

The foolhardiness lies in the fact that the need for philanthropic support has never been greater. In the aftermath of the global recession, students and their families are struggling to pay tuition costs that continue to rise. Unless schools, colleges, and universities can convince donors to provide additional aid for deserving students, educational opportunity will shrink even as the need for education grows.

More not less

Perhaps most alarming about these efforts to reduce philanthropic incentives is that they occur at a time of rapidly increasing wealth disparities. With a smaller percentage of the population holding a larger share of the world's financial resources, governments should be encouraging—not discouraging—voluntary giving by the most fortunate among us.

Indeed, some economists in the United States have argued that now is the time to double the charitable deduction. Not only would doing so help address pressing social needs and encourage charitable investments in education, it would inject large sums of idle money into a stagnant economy.

Perhaps it would be too much to ask the U.S. Congress to increase the charitable deduction when deficit reduction is the political priority. However, it is certainly not too much to ask that lawmakers preserve a proud tradition of philanthropy that has served as a beacon for the world.

And that's precisely why CASE has led a coalition of charitable organizations calling on Congress not to mess with what it takes to give.

About the Author John Lippincott

John Lippincott is president of CASE.