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President’s Perspective: Five Myths About the Charitable Tax Deduction
President’s Perspective: Five Myths About the Charitable Tax Deduction

The United States needs policies that reward generosity

By John Lippincott




In January 2013 the U.S. government was scheduled to go off the so-called "fiscal cliff," a combination of significant federal spending cuts and tax increases. During negotiations to avoid the cliff, both the White House and congressional leaders proposed reducing the value of the income tax deduction donors can claim for charitable contributions.

CASE, in conjunction with a coalition of charitable organizations, strenuously opposed changes to the existing system, which links the percentage of the deduction directly to the taxpayer's income tax rate. 

Our concerted advocacy efforts proved successful; however, the victory could be a temporary one. As lawmakers wrestle with balancing the federal budget, they may reconsider limits on the charitable deduction and may revive five myths to justify their efforts:

1. Donors give without regard to the tax deduction. Donors give to schools, colleges, and universities, first and foremost, because they want to do good and to give back. So, while it is true that the primary motivation for a charitable gift does not stem from a tax benefit, it is not true that donors are indifferent to the tax implications of their giving.

Tax policy does influence donors' decisions regarding the size, form, and timing of their gifts, according to researchers. In his 2011 report "The Market for Charitable Giving," University of Chicago economics professor John List notes that taxpayers would respond to a reduction in charitable deductions by cutting their gifts by the amount their tax bills increase. Favorable tax treatment incentivizes giving and is one reason the philanthropic tradition in the United States is among the strongest in the world.

2. Limiting the deduction hurts the wealthy. The proposals to limit the tax deductibility of charitable gifts have been primarily aimed at those with the highest incomes. The theory is that the wealthy can afford to take the hit. The problem with this theory is that when donors' cost of giving goes up, their actual giving goes down.

Thus, the real cost of limiting the tax deduction will be borne by the nonprofit, not the donor. A decline of just 1 percent in charitable contributions to higher education, for example, would be equal in value to 300,000 student scholarships in the average amount of $1,000.

3. Limiting the deduction will yield significant revenues for the federal government. A December 2011 Urban Institute study estimated that the White House proposal to cap the deduction at 28 percent would yield roughly $5 billion annually in new tax revenues, an amount equal to less than one-half of 1 percent of the federal deficit in fiscal year 2012.

Moreover, if we consider the net effect from limits on the charitable deduction, any benefit to the federal treasury is smaller still. Given that limits on deductibility will mean fewer private dollars to address societal needs, pressure will increase for federal and state governments to make up the difference. The very reason the deduction was created in 1917 was out of concern that the government would have to pick up the tab if philanthropy declined in response to increasing taxes.

4. The deduction is a tax loophole. A loophole is, by definition, some aspect of a given regulation that enables individuals to circumvent the intent of that regulation. The charitable deduction has been an integral part of the income tax code from its very earliest years. By giving to charity and taking the appropriate deduction, taxpayers are not circumventing the code but fully embracing it.

Unlike actual loopholes and other deductions, the charitable deduction requires a voluntary act of generosity on the part of taxpayers. In order to take the deduction, they must first give away assets that far exceed the value of any benefits they receive.

5. The deduction is unfair. Critics complain that it is unfair to allow some donors to deduct more than others based on their tax bracket. Among the key elements of fairness are consistency, clarity, and rationality. Linking the deduction to the donor's tax rate offers all three, whereas an arbitrary cap is a product of political expediency and hardly a guarantee of fairness.

The other flaw in the unfairness argument is that it treats the charitable deduction as if it exists in a vacuum. While those in the top tax bracket will, indeed, receive a higher percentage deduction for their gifts, they will most likely give more to charity and almost certainly pay more in taxes than those in lower brackets.

Finally, we need to ask ourselves: unfair to whom? Why is it unfair to reward those who are the most generous? After all, when we encourage generosity, the beneficiaries are the needy, not the greedy.

Because philanthropic support for education has never been more important, CASE will continue to work hard to dispel these myths and to promote government policies that stimulate giving to schools, colleges, and universities around the world.

About the Author John Lippincott John Lippincott

John Lippincott served as president of the Council for Advancement and Support of Education from 2004 through 2015.

 

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