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Reforming the Tax Code to Make It Pro-Soup Kitchen

A little tinkering with the charitable giving deduction could benefit the working class's favorite charities.
Soup kitchen

As it turns out, people aren’t donating to charity quite as much as they used to. This Tax Day, analysts estimated that the number of taxpayers who use the deduction for charitable contributions declined from 37 million to only 16 million between 2017 and 2018. Charity research organization GivingUSA estimated that charitable donations fell between 3 and 4 percent in 2018. The American Enterprise Institute (AEI) estimated a 4 percent drop.

Why? Recent changes in the tax code have pushed more Americans into using an expanded standard deduction, instead of taking advantage of itemized deductions, like the one for charitable contributions. That is a good thing broadly, but it has reduced the tax code’s incentives for charitable giving. This is just one symptom of the decline of our civic society and it needs to be addressed—fast.

Right now, taxpayers can deduct charitable contributions totaling up to 50 percent of their annual incomes. But this mostly helps richer people, since the vast majority of those who use itemized deductions earn above average incomes. Wealthier people, too, deduct their donations against a higher marginal tax rate. In other words, someone in a 15 percent tax bracket who deducts $100 receives a $15 lower tax burden, or a 15 percent subsidy of their charity. But for a taxpayer in the top 1 percent facing a 37 percent marginal tax rate, deducting $100 would lower their tax burden by $37, and they’d receive a 37 percent subsidy.

There are more problems still. People in different income groups have different charity priorities. There is disagreement as to whether the wealthy donate smaller shares of their incomes than others, but most analysts agree that they prioritize higher education, the arts, and health organizations. On the other hand, lower-income people focus their giving on local churches and food banks, philanthropies that help meet basic needs. But these aren’t the donations that are rewarded. Under the current tax code, the big-ticket donations the wealthy make receive a larger tax subsidy, benefitting big institutions over small community groups.

There’s an answer: scrapping the charitable deduction and replacing it with a tax credit for donations that’s available to everyone. Under this system, any taxpayer who reported a charitable contribution would receive a lower tax liability equal to, say, 10 percent of what they gave. Every donating taxpayer would get the same tax subsidy per dollar contributed, making the tax code more progressive and more neutral. Versions of this idea have been backed by progressive and conservative groups, from American Enterprise Institute economist Alan Viard to the Bipartisan Policy Center and the Simpson-Bowles Commission to the progressive think tank Demos.

This would work out better for the government. The charitable deduction will reduce tax revenue by $42 billion in 2019, according to the Joint Committee on Taxation. If we assume that charitable donations will be roughly equal to $400 billion in 2019, then a 10 percent charitable tax credit would reduce revenue by only $40 billion, which is a smaller tax subsidy than current law. And even though the subsidy would be a bit smaller, such a change could actually boost charitable donations. Surveys show that wealthier people are less responsive to tax incentives for charity, so reducing their tax subsidies probably wouldn’t significantly reduce their donations. Meanwhile, middle-class and lower-income people who didn’t receive tax breaks before would be more responsive, donating even more.

We do much to help the “little platoons,” as Edmund Burke once described, of civil society: local associations that make up community and provide a basic social safety net. But equalizing the tax treatment of charity would create a more even environment for them. Even with a smaller tax break, those with high incomes will still donate big buildings named after themselves, because those sorts of contributions are designed to build legacies. The difference would be that working-class communities would receive a tax benefit previously limited to the wealthy, and civil society institutions that have weakened in recent decades would get some much-needed support.

The government can’t centrally plan community. But if the tax code has incentives for charitable giving, we should design them in a way that doesn’t just favor the charitable preferences of the rich. After all, universities and concert halls are wonderful—but food banks need help, too.

Alex Muresianu is a writer at Young Voices. His work has appeared in National Review Online, The American Conservative, and The Orange County Register. Follow him on Twitter @ahardtospell.

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