Everyone agrees that it's good to donate to charity. Less certain is whether the US government should allow tax deductions for charitable giving. The answer may seem like a no-brainer, but consider this: They don't necessarily encourage giving, and they don't always help the poor.
A growing chorus of voices has been complaining about tax-deductible gifts that appear to benefit the giver. A hefty donation to Symphony Hall, for example, gets the donor noticed as civic-minded and cultured, but the benefit to society is far more difficult to pin down. In too many instances, critics say, giving acts to preserve the status quo rather than to benefit society and help those most in need.
As a result, the system imposes "the desires of the rich on social priorities and wealth redistributions," economist Tyler Cowen has said.
Robert Reich, secretary of Labor under President Clinton, called in a Los Angeles Times essay in October for a two-tiered deduction for charitable gifts. It would allow a full deduction for contributions that help the truly needy and a half-deduction for gifts to nonprofit "culture palaces: to the operas, art museums, symphonies and theaters where the wealthy spend much of their leisure time."
Sen. Charles Grassley (R) of Iowa has criticized the concept of "fractional gifts," in which art owners donate pieces to museums for part of a year, then claim tax deductions for the total value of the artwork. A law drafted by the Senate Finance Committee, on which Mr. Grassley sits, and passed as part of the 2006 Pension Protection Act, effectively ended the practice.
Meanwhile, in the 90 years since the personal income tax was introduced, it remains unclear whether tax breaks for charitable donations actually encourage giving.
Some research suggests that it doesn't. The Center on Philanthropy at Indiana University found in a 2006 study that "wealthy donors report that even major tax policy changes would not impact their giving."
Another example is the effect of the 1986 Tax Reform Act on donations. This law lowered the top marginal tax rate from 50 to 28 percent, reducing the value of a donation by 24 percent, according to the Washington-based nonprofit research and advocacy group Independent Sector. The law also eliminated the nonitemizer deduction for charitable contributions.
The law was heralded as a catastrophe for charities: Independent Sector and other nonprofit groups warned of an $11 billion annual drop in donations. But that didn't happen. In fact, a year after the law's enactment, nonprofit groups recorded a 10 percent increase in donations. A 1990 study by Giving USA concluded that, between 1986 and 1989, total charitable giving rose from just under $100 billion to $121 billion.
Continued criticism of the abuses of charitable deductions could lead Congress to further restrict the tax breaks that Americans get for their donations. It could force the government to raise taxes in order to fund programs that aid the poor. But that might decrease the amount of donations given by individuals to assist the needy. In Europe and Canada, for example, there tend to be higher taxes, far more government-run social services, and less individual giving.
Meanwhile, the US will probably continue to encourage individual giving through tax deductions. Since the 1980s, we've all heard the drumbeat of "the government isn't the solution," "government is inefficient," and the need to rely on a "thousand points of light" or "faith-based initiatives" – or some other way of saying "privately funded organizations."
Individual donations have a place, but they may not be the way to solve our greatest problems. And the tax code should reflect that.
• Daniel Grant is the author of several books, including "The Business of Being an Artist."