Mitt Romney may not be paying as much federal income tax as you’d like. But his charitable giving is extraordinary. Add the two together—taxes and voluntary giving—and you get something close to an overall rate that many would find acceptable.
This isn’t a popular way to look at Romney’s newly released tax returns. I agree with Warren Buffett and others who say that wealthy folks who, like Romney, can arrange to take most of their income through capital gains (not as more heavily taxed ordinary income) ought to be subject to a higher rate. Still, Romney appears to be squarely within the law. Arguably, if he were taxed more he would be less generous.
Why is that important? As I argue in my book, A New Purpose (with Ken Dychtwald), tax payments and charitable giving are close cousins; the receipts often fund similar causes, especially in the areas of health, education and poverty. With tax dollars, the government decides who and how to help. With charitable dollars, you decide. But it’s all for the greater good.
Government formally recognizes this linkage. That’s why you get a tax deduction for charitable contributions. The way government sees it, when you give (and take a deduction) the government doesn’t lose; it simply means that you—not bureaucrats—are directing more of your money to social good. Government even sees this as beneficial. The Federal Reserve Bank of St. Louis concluded:
“Federal and state governments understand that the tax revenues they lose through charitable deductions will be used more efficiently and effectively by local charities to support local infrastructures than if those same dollars were passed through the government’s hands. … Charitable activities can be accomplished in the private sector at about one-third less than what the government would have to spend to accomplish the same goals.”
Viewed that way, Romney’s tax return may be less offensive to those who believe he’s getting away with something. His federal income tax rate over the past two years was about 15%, a low figure for sure. But he donated about 15% of his income as well, which is way more than the vast majority of folks, rich or poor, contribute each year. Together he’s giving up about 30% of income, which is in line with what other top earners forfeit.
Of course, this doesn’t take into account the charitable giving of other rich people. That’s okay because there isn’t a lot of it, at least not relative to income. Billionaires like Buffett and Bill Gates and others who have taken the Giving Pledge command headlines and are to be applauded for their generosity. But they are the few.
Studies have shown that poor people give away a much higher percentage of their income than rich people. In this study, the lowest earners with annual pay topping out at $19,000 on average gave 4.3% of income while the highest earners on average gave just 2.1% of income. The average across income spectrums: 2.2%.
That puts Romney’s 15% giving rate ($7 million over two years) in an impressive light. Yes, much of his giving is to his church. But that’s true generally. In 2010, the majority of charitable dollars went to religion (35%), education (14%), grant-making foundations (11%) and human services (9%), according to National Philanthropic Trust. I’m not saying the system is fair or that Romney shouldn’t pay more income tax. Just that he gives a lot and it ought to count for something.