Just last week in the media we are hearing that the White House and non-profits are in an intense debate over the future of the charitable tax deduction, which about 40 million taxpayers claim each year, according to reports from the IRS. And so the story goes that Obama wants to limit or reduce the deduction high-income taxpayers get from donating money to a qualified charity or 501c3 organization in an attempt to reduce the federal deficit. Most Americans agree that reducing the federal deficit is a priority, but doing it by limiting the charitable tax deduction would not only hurt charities but also their beneficiaries, as Americans donate about $298 billion each year according to a 2011 annual report by the American Association of Fundraising Counsel.
Here is a list of the reasons as to why the charitable tax deduction should not be lessened or scaled back in any way but rather EXPANDED if anything:
- Capital is a Limited Resource – If you want to increase the funds that charities receive, then increase the deduction for charitable giving to qualified charities. If you want the opposite result, limit or eliminate the charitable tax deduction. Why? Capital is a limited resource. To simplify this, let’s consider an example and assume a single taxpayer earns $200,000 a year and only pays federal taxes. In 2012, that person would be in the 33% tax bracket. Say he or she wants to donate $10,000 to a qualified charity. By donating that $10,000 to charity, his or her taxable income is reduced by $10,000, and, therefore, that $10,000 really only costs $6,700 [$10,000 – (10,000 x .33)]. Now, if you eliminate the tax deduction, then that person may only give $6,700. Or, if you reduce the deduction percentage, you will reduce the amount they can give or will give in many cases. Some people may still give the same amount but to believe that it will not lessen overall donations is just misguided since the government would be essentially raising the price of giving.
- Charities Are Generally More Efficient – Let’s be real. Charities, in general, are going to be more efficient than the government in helping the less fortunate or people in need. Many charities leverage volunteers to help their beneficiaries so their administrative and operational costs are generally lower. Many pundits state that Medicare and Social Security are more efficient in terms of their administrative costs as a whole. On the surface, this seems to be the case. However, when you are receiving billions of dollars, administrative costs as a percentage of funds distributed will look like peanuts.
- Charities Can Provide Services When the Government Can not- There are thousands of qualified non-profit organizations and many of them specialize in providing services that the government is unable to provide or cannot provide at a certain time. For example, non-profits may conduct research, teach immigrants English, feed the poor directly, offer volunteering opportunities, providing opportunities for religious worship, and represent certain groups who do not have a strong voice in the community. Sometimes non-profits can provide support when the government cannot. For example, after Hurricane Sandy hit, the state and local governments simply did not have the resources to help everyone quickly. Charities like the Red Cross and others stepped in to provide that support. Therefore, if we weaken charities, they may just not have enough resources to provide support and services when the government cannot.
- Charities Encourage Volunteering, Community Engagement, and Self-Sacrifice – Charities encourage individuals to give of themselves which to many is a central component of what it means to be an American. It teaches children and adults to give back and help others in need. In turn, it provides hope to those in need that they are people out there willing to help. Lastly, it teaches self-sacrifice and selfishness which leads to emotional and spiritual growth. Limiting the charitable tax deduction may not cause all charities severe financial pain, but it definitely may cause some to cease operations especially if the economy takes a dive like it did in 2008.
- People Don’t Just Give Altruistically – More than 90% of the so-called rich (taxpayers with adjusted gross income more than $250,000) took an average tax deduction of $19,650 according to 2010 data provided by the IRS. It represented about 20% of their total tax deductions. If people did not care about the tax deduction, then why did so many claim it? Although many would like to think that the rich give just to give, it is without a doubt many give much more than they would otherwise because of the tax deduction associated with charitable contributions. When I give to charity there is no doubt in my mind I am considering the deduction I am going to receive because without it I would give less.