Why Limiting the Charity Tax Deduction Won’t Destroy Charities

Democrats worry that a GOP proposal to curb deductions for charitable giving would crush the finances of key nonprofits. It wouldn't. People give for dozens of reasons that have nothing to do with tax savings.

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At least one part of negotiations over the fiscal cliff appears misguided: Eliminating or capping the tax deduction for charitable contributions isn’t as big a deal as some fear.

Republicans have proposed raising $800 billion over 10 years by capping tax deductions for the wealthy, including highly popular breaks for mortgage interest, state and local taxes, and charitable giving. Democrats won’t hear of capping the tax deduction for charitable giving, which they say accounts for much or even most of the additional revenue.

“If you eliminated charitable deductions, that means every hospital and university and not-for-profit agency across the country would suddenly find themselves on the verge of collapse,” President Obama said on Bloomberg TV, as reported in The New York Times.  “So that’s not a realistic option.”

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Americans give about $300 billion a year. How much of that do you imagine is motivated solely by the tax savings? It’s hard to say but there’s reason to believe it isn’t all that much—not nearly enough, at least, that if it went missing would put a death grip on nonprofits coast to coast.

People who give do so for dozens of reasons, and tax savings often doesn’t even make their list. With co-author Ken Dychtwald, I looked at this issue in our book A New Purpose. Here’s a short excerpt:

“A lot of people assume saving on taxes is one of the biggest reasons people give money. But it’s a surprisingly small motivator. In virtually every survey on the subject those who give say the tax benefits are among their least important considerations. In an AARP survey, just 13% noted tax deductions as a reason for giving. The only factor cited less often was being asked to give at the office.”

If not personal economics, what does motivate giving? We found that people give both money and time because, above all, it’s simply the right thing to do. But they also enjoy making a difference, and by giving they express thanks for their good fortune or for what a charitable group had done for them or a family member; they like the recognition they receive and the new connections they make, and giving makes them feel good about themselves. All these intrinsic rewards trumped tax savings.

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Other people who study fundraising have reached similar conclusions. Experts commonly find that religious people are the most giving because donating money is a core part of their faith. This is a big factor in former presidential hopeful Mitt Romney’s generous tithing. Tax savings is a secondary consideration.

The online fundraising platform give2gether cites the top 16 reasons that people give, and none of them has to do with tax savings. Topping the list are the ability to feel involved in something worthwhile, a sense of compassion, recognition for doing something good, and (in households where giving is ingrained) the desire to follow in their parents’ footsteps. Here’s another list of reasons that people give. Tax savings makes the cut at No. 6 but still is overwhelmed by intrinsic rewards.

The economic benefits are much less a reason to give than most people realize, writes Kim Klein in the Grassroots Fundraising Journal:

“Most money given away in the private sector comes from individuals, and most of the gifts are from middle class, working class and poor people. That’s most people: 91% of Americans earn less than $100,000 per year, and 70% of adults give away money. More than half receive no tax benefit for their giving because they file a short tax form.”

Rich people, of course, file a long form and charitable deductions may have a big impact on their taxable income. But just because you have money doesn’t mean you have no sense of intrinsic value and reward. And rich people, even more than the middle class, give because they want attention; they may do it selfishly to be socially elevated and to hobnob with celebrities and see their names printed on thank you pamphlets and plaques, if not on university wings and buildings.

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Some rich people, no doubt, are motivated by tax savings and will curb their giving if the tax deduction is capped or eliminated. So, yes, it might be that giving falls off in that event. But the notion that multitudes of hospitals and other social service nonprofits would quickly collapse for lack of funding is highly suspect. People would still give—even, and perhaps more so, the selfish rich.

3 comments
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_yourdarkness
_yourdarkness

While this article highlights an interesting point, it's a half-baked argument. If most of the gifts from individuals are coming from people earning less than $100K, then even if tax doesn't sit high on their list of reasons for giving, it may sit very high on their list of reasons for not giving. Charitable giving is one of the first things to get cut from a budget, and if you're pushing the boundaries of your budget and this law takes effect, people will give less, even if they don't think taxes are their reasons for giving. It's pretty well established in psychology that people are also incredibly unaware of what really motivates them, that's why experimental pyschology exists; otherwise we could simply ask everyone.

It also doesn't look at the amounts of money coming from which number of people. If the majority of gifts come from people earning less than $100K, that doesn't mean the majority of money is coming from them. The non-profit I raise money for gets many small gifts, totaling millions of dollars each year. But those thousands of gifts don't come close to matching the dozens of gifts over $5M we bring in annually.

Think it through more thoroughly, this isn't a well though out article.

Ren
Ren

It may not have much effect on giving, but I'd wager it has a large effect on the choice of recipients.

Also, it seems that a reasonable argument could be made that at least some significant portion of donors either directly or indirectly also give the tax savings. If I save $300 on my taxes by donating $1000, there's a decent chance that some portion of that $300 will also be donated. (Or, perhaps I'd only have given $700 if I needed the $300 for my taxes.)

In the end, the money has to come from somewhere. By eliminating deductions, some portion of the increased taxes is likely to come from reduced spending that would have been deductible. Seems simpler to focus revenue increases on areas where this doesn't really apply. Increasing marginal rates doesn't specifically affect any particular type of spending. Increasing capital gains rates only affects the investment *earnings*, so the effect on the overall level of investment -- even given the above reasoning for charity -- is a fractional effect. (If investing itself where deductible, that would be a different issue. Since it's only the earnings, it's much less significant.)

mpittier
mpittier

The only people who give money to charity for tax purposes is when the charity is managed by . . . themselves.They´re donating money to themselves.  Otherwise, it wouldn't makesense to spend $1,000 to save $340!!!!