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Reforming the Tax Code to Make It Pro-Soup Kitchen

As it turns out, people aren’t donating to charity quite as much as they used to. This Tax Day, analysts estimated [1] 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 [2] that charitable donations fell between 3 and 4 percent in 2018. The American Enterprise Institute (AEI) estimated [3] a 4 percent drop.

Why? Recent changes [4] 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 [5]of their annual incomes. But this mostly helps richer people, since the vast majority [6] of those who use itemized deductions earn above average incomes. Wealthier people, too, deduct their donations against [7] 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 [8] as to whether [9] the wealthy donate smaller shares of their incomes than others, but most analysts agree that they prioritize [10] higher education, the arts [11], and health organizations. On the other hand, lower-income people focus [12] 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 [13] to the Bipartisan Policy Center [14] and the Simpson-Bowles Commission to the progressive think tank Demos [15].

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 [16]. If we assume [17] 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 [18] 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 [18] 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 [19] 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 [20]. His work has appeared in National Review Online, The American Conservative, and The Orange County Register. Follow him on Twitter @ahardtospell [21].

4 Comments (Open | Close)

4 Comments To "Reforming the Tax Code to Make It Pro-Soup Kitchen"

#1 Comment By Kent On May 14, 2019 @ 3:14 pm

We should eliminate any tax deductions for charitable giving. It’s not charity if you are doing it for the tax deduction anyway. This just forces the government to increase revenues in other areas to offset the loss to charities.

These days charities are just front-ends for an income for preachers and CEOs anyway.

I may be a little jaded.

#2 Comment By Dakarian On May 14, 2019 @ 7:03 pm

@Kent

You are being jaded. Just like everything on earth there’s people who abuse the system. However many charities do help others in major ways. It’s not libertarian to use the government this way but it is conservative to look for ways to encourage positive social actions and we know this is one that has an effect.

The idea will help middle class people but not really lower class. Remember that the lower class do not make enough to even have a noticeable income tax, which is why any tax changes does little to help them.

If you want the lower class to give (since they are more likely to give to those food banks) then it’ll have to be refundable. The alternative is to encourage cash over personal materials. That will push for more money that can be used for food rather than designer clothing and buildings.

I’m more for the latter. Make donations usable without itemizing, keep the material donation the same (clothing donated to a charity IS useful) and just give a bonus for cash donations.

Honestly a big way to fix a lot of the tax code to make it more progressive is to move an item out of the itemized section. You can literally donate, own a house, pay to have a baby and keep track of employee spending and STILL use nothing of the itemized deductions if you didn’t overspend and if you are less than 60k in income.

#3 Comment By George Taylor On May 14, 2019 @ 7:52 pm

I’m even more jaded then Kent. 503(c) is the greatest tax loophole of all for the ultra rich. Donations of appreciated assets like stock shares allow them to get out both capital gain and estate taxes. Many of them create there own family foundations that become nothing more then public relations entities that do vanity projects, like the Gates Foundation, or they become corrupt and used to influence like the Clinton Foundation. Think about the massively huge Harvard Hedge fund, cough cough I mean endowment, oh wait they give free tuition to family’s who make less then $70K, what percent of Harvard applicant families meet that criteria? I’m guessing no more then 5%. Not to mention that vanity non profits are the career of choice for the female children of rich elites who graduated from expensive liberal arts colleges with no real job prospects. I think you can get rid of this tax loophole and many others to pay for a guaranteed universal minimum income for all, without raising marginal income tax rates.

#4 Comment By Ksw On May 16, 2019 @ 11:33 am

Everything that’s old is new again. Let’s simplify the tax code.

Oh wait, let’s make the code more complex to drive behavior that someone thinks is good for society.

Can’t have it both ways.