Charitable tax deduction: What price for love?
In weighing tax reform, Congress has its eye on the charitable tax deduction – as a 'loophole.' It needs to first look at the changing ways that Americans give and then act to safeguard charity in all its forms.
Last week on Valentine’s Day, amid Washington’s noisy politics over the “sequester,” a House panel on taxation held a rather serious hearing on the cost of love – specifically, the cost of the tax deduction for charitable giving.
In the Senate, too, the Finance Committee is moving ahead on tax reform with the tax break for charity in its sights.
If there’s one thing that Democrats and Republicans might agree on, it is tax reform. And second to the mortgage-interest tax break, the most debated topic is the tax break for financial generosity.
As one of the leading nations for private giving, the United States cherishes this tax “loophole,” as its critics call it. The US has more than 1 million charities with about $1.5 trillion in yearly revenue. More than 38 million Americans use the tax deduction, which, if it were not available, would add an estimated $40 billion to the federal budget.
Billions in dollars, of course, are given away daily in ways that Uncle Sam never sees and aren’t usually deductible – to the homeless on the street, for example, or a friend in need. The poor give away a greater portion of their earnings than wealthier folks yet without reaching the income level to tap the charitable deduction.
Also less visible are the ways that giving itself is changing in America, a point that Congress must consider as it rethinks how to treat the monied act of private altruism.
Take crowdfunding, the small-scale investments made to start-ups via the Internet. This booming trend isn’t used only for profit enterprises. Nonprofit “social entrepreneurs” are tapping strangers over the Web in ways that could bring unforeseen changes in society.
At the megarich level, giving is now starting at a younger age, according to a survey of the top 50 donors by The Chronicle of Philanthropy. More of these billionaires prefer local causes and not to have their names attached to a cause or institution that receives their money. Others are now giving to institutions hit by state budget cuts.
Philanthropy evangelists Bill Gates and Warren Buffett continue to round up the super-rich to make a pledge to give away more than half of their wealth before they die. So far, 102 billionaires have signed up with about a dozen non-Americans recently joining.
One of the more interesting trends in giving is among the young wealthy. A survey of 310 people ages 21 to 40 with inherited wealth finds they are giving money away differently than previous generations. They reject “checkbook philanthropy” for a more engaged style. They are more attuned to their personal values, consulting their peers more on ways to give, and more accepting of risk in their giving.
“They see themselves as focused on impact, first and foremost,” states the survey done by the Johnson Center for Philanthropy and 21/64, a nonprofit consulting practice. “These generations of major donors have the potential to become the most significant philanthropists in history.”
If Congress and President Obama try to whittle back the tax benefits for giving, they need to do so smartly, based on real-world knowledge of this huge and complex phenomenon in American society. Charity comes from the heart, but it can be expressed in new and different ways. Tax policy to encourage that cannot succumb to the politics of the moment.