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Many Americans (we hope) filed their taxes last month. Depending upon your political perspective, different sides sought to highlight any data they felt would further their argument. Democrats share data that tax refunds are down. Republicans counter that Americans were taxed less and refunds were lower because less was deducted from each paycheck over the course of the past year.
Not-for-profits, for their part, are concerned about the impact of the Trump/GOP tax cut on charitable contributions. Our very own Lilly Family School of Philanthropy at Indiana University will provide us more conclusive data when it releases its annual Giving USA study next month.
The expectation is that charitable contributions will increase this year, largely based upon two factors: Charitable contributions have positive connection to gross domestic product and the stock market. Both have been heading upward since 2010.
Less has been said about whether there has been an increase or decrease in the number of people who make charitable contributions, which should be of equal, if not greater, concern for our country. If numbers show (as some scholars indicate) that we will see a reduction in the number of donors, this has alarming consequences for our society.
Scholars indicate that greater income inequality might provide a partial answer to this possible trend. But it can also be argued that limiting tax deductions to those who itemize their deductions when filing taxes encourages charitable donations only from the wealthy few.
The Urban-Brookings Tax Policy Center estimates that the Trump/GOP tax cuts, which are achieved in part with a higher personal deduction, will reduce the number of people who itemize their deductions from 26% of Americans to 10%. That means Americans making identical gifts to the same organization might have a different cost of giving, depending upon their wealth. For example, a donor who doesn’t itemize and gives $100 to a local not-for-profit will receive no tax benefit for that gift. A person who earns more and itemizes will be able to claim the same $100 gift for a deduction, resulting in a public subsidy of that gift.
People give two principal arguments in favor of charitable deductions: the efficiency rationale and the pluralism rationale. According to Rob Reich in “Just Giving: Why Philanthropy is Failing Democracy and How it Can do Better,” actual data on giving suggests some problematic trends.
The efficiency rationale suggests that government achieves greater good by allowing its citizens subsidies for supporting charitable activity. The challenge with this argument is that research shows that, as givers become wealthier, they are less likely to support causes that alleviate poverty. Most important, our current tax policy suggests that only those who itemize provide social-good efficiency. This is a problematic assumption about the production of social good based upon our ability to earn.
The pluralism rationale suggests that the charitable deduction amplifies the voice of our citizens through their diverse engagement with our not-for-profit sector. Again, because the charitable deduction applies only to those who itemize, this rationale is challenging to support. In essence, our tax policy suggests that only those who have wealth are worthy of their voice being amplified.
I support the charitable deduction because the public policy rationales behind this instrument of social good have merit. We are not implementing the charitable deduction in a way that can further amplify the not-for-profit sector and the social good it provides our society.
We should find a mechanism to make charitable deductions available to all Americans, regardless of their wealth, to further social equity.•
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Siddiqui is an attorney, has a doctorate from the Lilly Family School of Philanthropy at IU and leads the Association for Research on Nonprofit Organizations and Voluntary Action. Send comments to ibjedit@ibj.com.
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