Psst: Want to know a way to reduce our national debt by a quarter of a trillion dollars over the next decade, and remove an often abused and possibly unconstitutional section of the tax code? Are you sure you do? You may want to sit down.
Get rid of the federal charitable-giving tax deduction.
I know that statement will create a firestorm. I ran the California Community Foundation for 25 years, and the foundation — not to mention your alma mater, the Girl Scouts, the AARP and many other charities — think pretty highly of the tax deduction. It's a third rail of the tax code, right up there with the hallowed mortgage deduction.
But almost a century after the charitable tax deduction was enacted, nobody can say positively, absolutely how much, or even if, it stimulates giving, which was its primary purpose. Moreover, in order to receive tax-deductible gifts, nonprofit corporations must become second-class corporate citizens — they are not allowed to contribute to political campaigns, to lobby or to otherwise politically advocate for the very constituencies they were created to serve.
Last May the Congressional Budget Office presented President Obama with 11 variations on the charitable deduction. It weighed deductions with floors against deductions with ceilings, tax credits with and without floors, incentives for itemizers and non-itemizers.
Obama studied the variations and decided that what we currently have is good enough, but he suggested that Congress get more money into federal coffers by lowering the deduction that those earning $200,000 or more can claim against their charitable donations, from 35% (the top rate of federal income tax) to 28%.
That didn't sit well with the philanthropic sector. So in October, Sen. Orrin Hatch (R-Utah) held Senate Finance Committee hearings on the charitable deduction and, predictably, got an earful.
First United Way of America's Brian Gallagher issued the stern warning that if the top deduction were reduced from 35% to 28%, "you should expect that donors will simply withhold the difference to cover the tax."
This is a logical and often-used argument, but statistics don't necessarily bear it out. The deduction follows tax brackets, and the top tax bracket for individuals has gone down from 70% in 1980 to 50%, then to 39%, then to the current 35% in 2003. The cost of giving, at least among the wealthy, went up as the top bracket went down, so contributions should have declined. But they didn't.
According to data collected by the Giving USA Foundation, charitable donations over the last 25 years have remained solid as a rock, hovering between 1.7% and 1.95% of personal income year in and year out. If giving didn't decrease when rates went from 70% to 35%, why would it go down by lowering the rate to 28%?
Hatch's next speaker was Dallin H. Oaks, a member of the Quorum of the Twelve Apostles of the Church of Christ of Latter-day Saints, one of the very few times a member of that august Mormon body has ever testified before a congressional committee.
In retrospect, having Oaks testify might seem a curious choice. Providing federal subsidies to what goes in church offering plates is the elephant in the living room of the charitable deduction. Many consider the federal underwriting of donations to religious institutions a violation of the clause forbidding the establishment of religion under the 1st Amendment, a practice that knocks a hole in Thomas Jefferson's "wall of separation between church and state." But as with "In God We Trust" on the quarter, we've been winking and nodding our way around this for decades.
Constitutional questions, and the strong possibility that the charitable deduction isn't much of a motivation for most donors, aren't its only drawbacks, not by far.
Abuses of the charitable tax deduction are many and, at least to me, hard to forgive. Anyone who's been in the fundraising business knows that when a prospective donor's first question is about the tax deductibility of the gift, it's time to grab your wallet and gird your loins. How pervasive is cheating? Even Congress' usually understated Joint Committee on Taxation has observed, "Evidence from audits … establishes that many taxpayers overstate their actual charitable contributions." That's lawyer talk for "holy smokes."
It's impossible to put a precise number on the abuses, but when it comes to federal revenues, they are the equivalent of death by a thousand cuts — the phantom $20 bills in the offering plate, a deducted auction item here and a gala fundraising dinner there (it's not legal to deduct a donation if you get goods or a dinner of equal value in return), a donated car that goes from clunker to Blue Book "good" overnight — it adds up to billions of dollars every year.
Not only do nonprofits get only a fraction of the money claimed as deductions, they pay a heavy price for accepting tax-deductible gifts. Last year the Supreme Court ruled that when it comes to free speech, corporations are the same as people and can contribute all they want to politicians and political action groups. All corporations except nonprofit corporations, that is. Support a political candidate from the pulpit, or contribute to your local congressman, and you will lose your tax-exempt status. Nonprofits also are the only segment of our corporate society whose executive salaries can be sanctioned for being "excessive." (Try flying that one past Wall Street.)
Philanthropy may be a Greek term, but America perfected it. It is so much a part of who we are, it is not dependent on well-meaning but often nonproductive attempts to subsidize or control it. Charitable Americans created the charitable deduction, not the other way around. Would you really stop giving to your college, church or to children in need simply because the charitable deduction were reduced or removed?
Obama's suggestion to reduce the top charitable tax deduction to 28%, which has been part of the jobs bill currently languishing in Congress, is a good start. But the budgeteers and tax code reformers ought to go even further. It's time to do away with the charitable deduction altogether.
Jack Shakely is president emeritus of the California Community Foundation.