Tax policy and charitable giving


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  • Hello and thank your for inviting me to be here. I am going to talk today about charitable giving or philanthropy and tax policy. Philanthropy you say? What is there to think about? It’s just what we do right? And tax policy—ugh, boring! Actually, both get pretty darn interesting if you consider that both are about money and money, in our society, always equals power. And most likely all of give and all of us pay taxes. HOW MANY OF YOU HAVE GIVEN TO CHARITY? DONE YOUR TAXES? Now don’t worry, I’m not an economist or tax expert, so we won’t get too bogged down in the technical details of tax policy. But given the current debate about the federal budget, with tax policies prominent in that debate, as well as the lingering economic downturn, understanding tax policy’s effect on charitable giving and the role of this giving in our society is important. I am broadly interested in issues related to public administration and democratic governance, and in particular the role philanthropy or charity can and should play in democratic governance. Focusing in on tax policy and charitable giving is one way to understand these broader issues.
  • Charity and philanthropy have a long tradition in the United States; its importance emphasized among European settlers, witnessed later by Alex de Tocqueville when he visited America in the late 1800s, and praised and supported since by leaders such as President Kennedy, quoted here, and continuing to today. The way we talk about charity and philanthropy in the U.S. would make one think it’s in our American DNA to give when the need arises—maybe it is. But in recent years charity and philanthropy have also been used as a way to link voluntary action to smaller government; to encourage philanthropy and charity as replacements for state-sponsored collective action. Harkening back to a pre-Great Depression era, in the past few decades, charity and philanthropy have received renewed emphasis in the U.S. and abroad. Starting when Ronald Reagan famously proclaimed in his 1981 inaugural address that “government is not the solution to our problem” and continuing to today—an ideology that has advocated for less taxes, fewer social welfare subsidies, and more charity. George H.W. Bush’s “thousand points of light,” Bill Clinton’s “charitable choice amendment,” and George W. Bush’s “faith-based initiative” are all examples of this. Obama has continued… The current budget battle/discussion highlights the desire by some to rollback the state even more than already done in the past 40 years. Will philanthropy be able to come to the rescue? Will a change to tax incentives make a difference?
  • Americans do give a lot--In 2009, charitable giving by individuals, corporations, and foundations was estimated to be $303.75 billion by Giving USA. Slightly down in real terms from the previous year. This is estimated to represents bit less than 2% of GDP. Most of this giving comes from individuals.
  • And just to put this into further perspective, this private giving represents about 10 percent of public charities’ revenue each year. In fact, the amount of giving as a percent of nonprofit revenue has been getting smaller over the past several years. Only 10 years ago it was closer to 20%.
  • But, compared to other countries, Americans are quite generous. Twice as generous as the English and Canadians. We have in the U.S. what some have called a “culture” of philanthropy and that culture extends to tax policies meant to encourage charitable giving.
  • Tax incentives for charitable giving in the U.S. have been in place since the federal government initiated them not long after establishing the federal income tax in 1917. Today, at the federal level, individuals and corporations that itemize can deduct a certain percentage (depending on their level of income) of charitable donations from their federal income tax. As policies currently exist, the higher your tax bracket, the higher the percentage you can deduct for contributions. Individual itemizers represent about 35 percent of taxpayers.; 90 percent of these claim charitable deductions. The federal estate tax has also allowed for a deduction for every dollar bequeathed to charitable organizations. About 18% of estates filing estate tax returns in 2003 provided for charitable bequests. Overall, estates bequeathed 7% of their wealth to charity. In addition, about 33 of the 43 states with personal income taxes have some type of tax incentive for charitable giving.
  • Because of the importance we put on giving in the U.S., it is no surprise that every time someone proposes significant changes to federal tax policy related to charitable giving, a debate ensues about its potential effect—most immediate reactions being highly critical of any reduction in incentives. This has been true when just last week President Obama again proposed reducing the value of the charitable deduction for the very wealthiest of Americans (taxpayers in the top two tax brackets that make more than $250,000 in income—1.5% of all U.S. households) from 33 or 35 cents to 28 cents for each dollar donated, to help balance the budget.
  • This proposed change has led to a spate of criticisms from the philanthropic community and conservative think tanks, with claims that the change would have a significant negative impact on giving. For example, Ryan Messmore at the Heritage Foundationrecently claimed on a blog post that this proposal to reduce charitable deductions would “crowd out civil society,” and shift resources to the federal government, which is less efficient and effective at caring for the needy.
  • Are these claims true? To what degree would giving be affected by tax incentive changes? Furthermore, who benefits from the tax incentives as they exist now and to what end should they exist? Is charity and nonprofit organizations better at serving the needy? Let’s examine the evidence. We assume a lot about charity and philanthropy – it’s good to examine the evidence and make personal and policy decisions based on this evidence rather than on assumptions or ideology.
  • Tax incentives essentially lower the cost of giving. For example, a taxpayer who itemizes and is “in the 28 percent tax bracket who gives $100 to a favorite charity cuts his or her tax bill by $28 with a charitable tax deduction, in effect reducing the cost of the donation to $72” (p. 1). The net after-tax cost to the donor per dollar of donation is called the “tax price” of giving. Typically, when people react to potential charitable tax changes, they are concerned most with the tax price of giving and how changing it will affect overall giving.
  • The price elasticity of giving is a measure of how responsive giving is to a change in its cost or tax price. So A price elasticity of -1.0 indicates that reducing the cost of giving by 50 percent raises giving by 50 percent, while a price elasticity of -0.5 means that a 50 percent drop in the price of giving would increase giving by only 25 percent” (p. 1). The big question then, is how price elastic is giving? From a tax policy perspective, it matters whether the price elasticity of giving is greater than 1.0. If it is, then taxpayers who claim tax deductions for charitable contributions are likely to increase their giving by more than the estimated revenue cost of the subsidy. In such a case, the subsidy would be said to be "treasury efficient." If the elasticity is smaller than 1.0, the extra giving prompted by the charitable deduction is less than the revenue cost of the deduction to the U.S. Treasury; therefore, the tax subsidy would be "treasury inefficient." In principle, the government could actually increase the financial resources of nonprofit organizations by eliminating the charitable deduction and then using the extra revenue collected to make grants directly to charities.
  • Research on the price elasticity of giving, or the effect of changes in the tax price of giving, have shown mixed results. In a classic study, “Clotfelter (1985) found a range for the elasticity of charitable giving relative to changes in the tax price of giving of between -1.1 and -1.3. However, other studies have challenged the conclusion that giving is so sensitive, estimating price elasticities that are much smaller (cf. Randolph, 1995; Ricketts & Westfall, 1993; Steinberg, 1990). Barrett, McGuirk, and Steinberg (1997, p. 321), for example, found, using panel data, price elasticity at +.47. Furthermore, tax-rate cuts enacted in the 1980s challenge Clotfelter’s findiings. According to Cordes (2001): The Tax Reform Act of 1986 increased the after-tax cost of giving, often significantly. The predicted drop in giving, however, did not materialize. With the exception of taxpayers in the highest income tax brackets, charitable giving remained quite stable. The implication was that giving may not be as sensitive to price incentives as indicated by some econometric models (p. 2).
  • Indeed, according to Giving USA, giving as a percent of the GDP in the U.S. has remained at just around 2% for the past 40 years. The Center on Philanthropy at Indiana University has found that the best predictor of increases or decreases in giving is Standard & Poor’s 500 Index.
  • Estimates for the specific tax changes, using 2006 data are also mixed: The Center on Philanthropy at Indiana University, using 2006 data, estimates that: Giving by high-income households would have been 4.8 percent [$3.9 billion] less if President Obama’s proposed limits on charitable deductions, and increases in taxes owed by the wealthiest Americans were in effect then. ( The Chronicle of Philanthropy ). But just a 2% decrease overall. Alternatively, the Tax Policy Center estimates a $9 billion reduction in annual giving. The change would affect roughly 12 percent of individual charitable contributions. But, the Center on Budget Policies and Priorities finds the proposal will reduce total charitable contributions by only 1.3 percent . It’s not clear to what degree these estimates account for the fact that as, Robert F. Sharpe Jr., a fund-raising expert in Memphis, was noted as saying in an article in the New York Times , many of the wealthiest donors are already limited to deductions of 28 percent for their charitable gifts because they are subject to the alternative minimum tax. Furthermore, according to GivingUSA, “Obama’s proposal to trim the deductibility of charitable donations from the current 35 percent to 28 percent over time is not necessarily going to change giving patterns of generous Americans.” This is because Changes in income and tax benefits are two important drivers of the amount households give to charity – but they are not the only drivers. Changes in wealth and recent giving history also are important in individual and household giving. However, non-economic factors, such as volunteering, social connections with other people, and values and beliefs, also play a role in the decisions made by the families that give to charity.
  • In addition, not all donors are motivated in the same way by tax incentives. For instance, according to the 2008 Bank of America survey done by The Center on Philanthropy at Indiana University on wealthy donors, nearly 52 percent said their giving would remain the same if they no longer received any income-tax deduction for their donations. Alternatively, 47 percent said they would give less if they could no longer claim a deduction for their charitable gifts. However, of these respondents, 37 percent said their contributions would “somewhat decrease,” and only 10 percent said their gifts would “dramatically decrease.” Similarly, research done by the Independent Sector of various types of donors found only about one-third of respondents reported tax considerations and deductions as a major or a minor motivation to give to charity (Tiehen, 2001). The surveys indicated that the more respondents are motivated by tax considerations and deductions, the higher their price elasticities for charitable giving. The estimated price elasticity is –2.21 for those who regard tax considerations and deductions as a major motivation, while it is –0.79 for those who regard them as a minor motivation, and 0.02 (and not statistically significant) for those who do not regard them as a motivation to give (Tiehen, 2001, p. 717).
  • Research suggests the sensitivity of charitable giving to potential tax changes differs substantially among types of funding areas as well. For instance, Feldstein found that charitable gifts to educational institutions and hospitals were very sensitive to the cost of giving while health and social welfare were less sensitive than education and hospitals but more sensitive than religious organizations. The conclusion about how much tax incentives affect giving is that it is not clear. There is no way to ethically make a claim, as the Heritage Foundation and others have done, that reducing tax incentives would “crowd out civil society and discourage charitable donations.” It depends perhaps on a donor’s motivation and the areas to which they give (more on this in a bit), but overall, studies on the price elasticity of giving and the degree to which tax incentives matter to donors are mixed and historic evidence—what actually happened when the price of giving did increase—show that charitable tax incentives do not influence giving as much as some suggest. We could stop here and be satisfied that what President Obama is suggesting is not the terrible thing it has been made out to be; however, the argument for charitable tax incentives is often associated with the benefit they presumably bring to communities—supporting groups not otherwise served and providing donors with more of a “democratic” say in how community problems are addressed. Some argue that providing for the poor is the responsibility of individuals in local communities, not government, and so by encouraging greater reliance on individual contributions, a “market” in charitable giving could be stimulated that would supposedly strengthen groups that help the poor and eliminate or reform those that do not (Barwick et al., 1998). Is it the case that donors by and large help the poor and address significant community problems? Let’s look at the evidence. WHAT TYPES OF ORGANIZATIONS DO YOU THINK BENEFIT MOST FROM CHARITABLE GIVING?
  • Hodgkinson (1996): Over 70%, or 55.8 billion, covered operating expenses. Other expenses included $10.3 billion for property improvements and acquisition and $9.6 billion in donations to other organizations and individuals. Of the $9.6 billion in donations by religious congregations, 66% was distributed within the denomination 23% to organizations outside the denomination, and 11% was given in direct assistance to individuals . (p . 5).
  • A study sponsored by Google and conducted by The Center on Philanthropy at Indiana University (2007) found “less than one-third of the money individuals gave to nonprofits in 2005 was focused on the needs of the economically disadvantaged. Similarly, a study by the Institute for Jewish and Community Research found only five percent of the total dollars from mega-gifts (gifts of $1 million dollars or more) go to social service groups (Tobin & Weinburg, 2007). These giving patterns are indicative of research findings that show people give to whom and to what they know and to causes with which they can identify and are physically or emotionally attached. Indeed, wealthy philanthropists—who provide the bulk of philanthropic dollars—do tend to give mostly to organizations from which they or their family benefit such as the symphony, church, or their alma mater (Odendahl, 1990, p. 67; Ostrower, 1995) as well as to amenity services such as education, culture, and health (Wolpert, 1993, p. 7). Certainly, the analysis of mega-gifts shows this to be the case for wealthy donors; they gave 44 percent of total dollars to colleges and universities, followed by hospitals and other medical institutions (16%), and arts and cultural organizations (12%) (Tobin & Weinburg, 2007). This is true as well for private giving more generally. Overall, most donations go to support community churches and synagogues, YMCA’s, museums, and parochial schools—“services that donors themselves use—and are not freely available to target the neediest and to sustain safety nets” (Wolpert, 1997, p. 101). On the other side of the equation, charitable organizations that rely heavily on giving are less likely to serve the poor. Salamon (1992) found in a study of human service organizations that the majority of organizations studied did not provide services or advocacy for the poor. Among those that did serve the poor, the bulk of their funding was from government sources. Galaskiewicz et al. (2005) also found nonprofit organizations in low-income neighborhoods had a high percentage of government funding and almost no philanthropic support. There is strong evidence to suggest the nonprofit organizations providing safety net services have historically been reliant on government rather than charitable support (cf. Hammack, 1999; Salamon, 1995). Rather than government crowding out charitable giving, Wolpert (1993) found that “places that are generous in their state and local government programs tend to be generous in their charitable contributions as well” (p. 2). If you ask foundation leaders…
  • Gini Index—A commonly used statistical measure of income distribution. Zero is absolute equality and 100 is absolute inequality—applied to income distribution. Perhaps if Tocqueville came to America today, he would say something like “while in other countries the people protest and strike when inequities and injustices exist, demanding the govt address these, in the U.S., people donate to charity.” Data from UN Development Program and Unicef.
  • As indicated earlier, the wealthy give the most; so they have more of a say in who benefits from giving and benefit the most from tax incentives. Those at the highest tax bracket (35% in the U.S. in 2008) receive the largest deduction, those in the lowest tax bracket (10%) receive the lowest deduction. Because wealthier individuals donate more as an absolute amount and receive a larger subsidy for giving, wealthier individuals have more of a say in who benefits from charitable giving compared to less wealthy individuals (or those who are not able to give at all). The result is that “we get not egalitarian citizen voice in civil society but plutocratic citizen voice, underwritten and promoted by tax policy” (Reich, In press, p. 23).
  • Current tax policy results in a shift from government deciding to people who can give deciding. There are very real and substantial amounts of money affected… Currently, the federal charitable tax deduction “is the fourth largest (out of 130) tax expenditure given to individuals, after deductions for mortgage interest, contributions to 401(k) plans, and state and local taxes”(Reich, 2005, p. 28). This is more than half of the annual budget for the U.S. Department of Housing and Urban Development and ten times what the U.S. spends on international development assistance (U.S. Government Printing Office, 2010). Think of what could be done for the poor and low-income if even part of these additional funds were spent to end rather than ameliorate poverty.
  • Even if charitable tax incentives are “treasury efficient” and induce more donations than the amount the government forgoes in revenue—a big “if” based on studies of price elasticity described above—most discussions on charitable tax incentives do not consider who benefits and the implications of letting donors decide social policy. When we examine these other areas, we see rather clearly that relying on charitable giving to provide for basic social welfare needs is not adequate or appropriate for several reasons: donors do not often, on their own, fund the poor and those most in need; providing interventions to compel donors to give to the poor and low-income compromises one of the most valuable aspects of philanthropy—the pluralistic freedom for all donors to have a voice in social policy; and relying on philanthropy to serve the poor is problematic for democracy because it gives greater voice to wealthy donors and divides citizen into givers and receivers instead of a commonwealth of fellow citizens. Do we want to live in a society where the wealthy get more say in the creation of social policy and where the poor are forced to remain inferior supplicants? Or would we rather live in a society that requires all of us to share the burden of governance, where democratically elected representatives, with input from citizens, decide where best to distribute resources? As Reich (In press) notes: “citizens can unelect their representatives if they are dissatisfied with the spending programs of the state; the Gates Foundation also has a domestic and global spending program, partly supported through tax subsidies, but its directors and trustees cannot be unelected” (p. 11).
  • Given this, the need is to equalize and minimize (or even eliminate) charitable tax incentives. Reich argues that providing tax incentives really only makes sense in encouraging equal opportunities for citizens to participate in civil society—the pluralism argument—thus, we do not necessarily want to get rid of all tax incentives but we do need to make them fairer. Reich suggests, for example, “a flat and capped nonrefundable tax credit for charitable donations. By offering an equivalent tax credit to all donors (say 25% of any donation) with the credit capped at some level (say $1,000), the mechanism avoids the upside-down structure of the deduction, offers an equal credit to all donors, and of course affords donors the liberty to continue to give” (p. 24). Such a system would also serve to limit (but not eliminate) tax incentives and shift more revenue to governments. In the end, if we are concerned with helping the least among us as fellow citizens, we need to consider more progressive tax policies and not expect that charity can or should address these needs.
  • Tax policy and charitable giving

    1. 1. U.S. Tax Policy and Charitable GivingHow much, for whom, to what end? 1 1
    2. 2. The raising of extraordinarily large sumsof money, given voluntarily and freely bymillions of our fellow Americans, is aunique American tradition...Philanthropy, charity, giving voluntarilyand freely... call it what you like, but it istruly a jewel of an American tradition. --John F. Kennedy 2
    3. 3. 2009 Charitable Giving in U.S.Total = $303.75 Billion 3
    4. 4. Who Benefits 4
    5. 5. U.S. Giving Compared to OtherCountries (2005) Country Giving as % of GDP United States 1.67 United Kingdom 0.73 Canada 0.72 Australia 0.69 South Africa 0.64 Rep of Ireland 0.47 Netherlands 0.45 Singapore and New Zealand 0.29 France 0.14 Source: Charities Aid Foundation, November 2006 5
    6. 6. U.S. Tax Incentives for Giving• Individuals and corporations that itemize can deduct a certain percentage (depending on their level of income) of charitable donations from their federal income tax. – Individual itemizers represent about 35 percent of taxpayers; 90% claim a charitable deduction.• Full deductions for bequests. – 18% of estates filing estate tax returns make charitable bequests.• Most states with personal income taxes have some type of tax incentive for charitable giving. Source: U.S. Dept of Treasury, Joulfaian, 2005. 6
    7. 7. Proposed Tax Changes .33 - .35 cents .28 cents 7
    8. 8. Criticisms and Claims• Reducing the charitable deduction will “crowd out” civil society and discourage charitable donations.• It will shift resources from private nonprofit charitable organizations to the federal government, which is consistently less effective and efficient in caring for the needy. --Messmore, The Heritage Foundation 8
    9. 9. Questions• How much is giving affected by tax incentives?• Whom do tax incentives benefit?• To what end do/should tax incentives exist (if at all)? 9
    10. 10. How Much?Tax incentives essentially lower the cost ofgiving.For an itemizer in the 28% tax bracket: Giving $100 Net cost = $72 Tax price 10
    11. 11. How Much? Price elasticity of giving = How responsive giving is to a change in its cost.If reduce cost of giving by 50%: Price Elasticity Change in Giving Example -1.0 Increase giving 50% $100  $150 -0.5 Increase giving 25% $100  $125 What is the price elasticity of giving? If > 1.0 it is “treasury efficient” = increase giving > estimated revenue cost of tax subsidy/incentive 11
    12. 12. How Much?Studies on the price elasticity of giving show mixedresults:•Clotfelter (1985) found a range for the elasticity of charitablegiving relative to changes in the tax price of giving of between-1.1 and -1.3.•More recent studies have challenged the conclusion that givingis so sensitive, estimating price elasticities that are much smalleror even positive. – e.g. Barrett, McGuirk, and Steinberg (1997, p. 321) found, using panel data, price elasticity at +.47.•The Tax Reform Act of 1986 increased the after-tax cost ofgiving, often significantly, but the predicted drop in giving did notmaterialize. 12
    13. 13. How Much?• Giving as percent of GDP has remained about the same for past 40 years (ave. 1.9%) Source: Giving USA 13
    14. 14. Estimated Impact of Proposed TaxChanges• Policy centers estimate .33 - .35 cents ranges from little to no .28 cents impact to a decrease of 12%.• Many already limited to 28% deduction.• Many other factors influence giving. 14
    15. 15. How Much?Not all donors are motivated in the same way bytax incentives.•Center on Philanthropy study of wealthy donors found 52% saidgiving would remain the same if they no longer received anyincome-tax deduction for donations. – 37% said giving would “somewhat decrease” and 10% said it would “dramatically decrease.”•Independent Sector found only about 1/3 of respondents in1989 and 1991 Giving and Volunteering Surveys reported taxconsiderations and deductions as major or minor motivation togive to charity. – Tax considerations major motivation, price elasticity of giving - 2.21 – Tax considerations minor motivation, price elasticity of giving - 0.79 – Tax considerations no motivation, price elasticity of giving 0.02 15
    16. 16. How Much?Sensitivity to charitable tax incentives also differsamong types of funding areas•Educational institutions and hospitals very sensitive•Health and social welfare less sensitive•Religious organizations least sensitive 16
    17. 17. Types of recipients of contributions, 2006, total = $295.02 billion International Environment Arts, culture, affairs and animals Unallocated and humanities $11.34 $6.60 giving $12.51 3.8% 2.2% $26.08 4.2% 8.8% Public-society benefit Foundations $21.41 $29.50 7.3% 10.0% Health Religion $20.22 $96.82 6.9% 32.8% Human services $29.56 10.0% Education $40.98 13.9% 17
    18. 18. Who Benefits• Google /The Center on Philanthropy study (2007) found “less than one-third of the money individuals gave to nonprofits was focused on the needs of the economically disadvantaged.”• Institute for Jewish and Community Research found only 5% of the total dollars from mega-gifts (gifts of $1 million dollars or more) go to social service groups. – 44% to colleges and universities, – 16% hospitals and other medical institutions – 12% arts and cultural organizations• Charitable organizations that rely heavily on giving are less likely to serve the poor (Salamon, 1992; Galaskiewicz, 2005). 18
    19. 19. Who Benefits Country Giving as % Gini % Child w/ Income of GDP Index < 50% of Median United States 1.67 40.8 21.7 United Kingdom 0.73 36.0 16.2 Canada 0.72 32.6 13.6 Australia 0.69 35.2 11.6 Netherlands 0.45 30.9 9.0 Germany 0.22 28.3 10.9 France 0.14 32.7 7.3 19
    20. 20. Who DecidesWealthier individuals have more of a say in who benefits:•Those at the highest tax bracket (35% in the U.S. in 2008)receive the largest deduction, those in the lowest tax bracket(10%) receive the lowest deduction. 20
    21. 21. Who Decides?Public revenues lost as a result of charitable taxdeductions were estimated to be more than $50 billionin 2008.•4th largest tax expenditure•More than half of the annual budget for the U.S.Department of Housing and Urban Development.•Nearly 20 times what the U.S. spends on internationaldevelopment assistance. 21
    22. 22. For What?• Charitable tax incentives rest on the assumption that individual donors, rather than government officials, “should have a stronger voice in determining how the needs of low-income families and communities are addressed” (De Vita & Twombly, 2005, p. 570). – Clearly not adequate for addressing social welfare issues. – Providing interventions to compel donors for social welfare compromises one of most valuable aspects of philanthropy-- donors’ freedom to choose. – Allows wealthy to decide. 22
    23. 23. Conclusion• Reich—providing tax incentives really only makes sense in encouraging equal opportunities for citizens to participate in civil society. – Flat and capped nonrefundable tax credit for charitable donations.• More progressive tax policies that compel wealthy individuals to pay a greater share into government coffers. 23