Obama's right: The wealthy don’t need a huge tax break to support charity

What motivates people to donate to charities? The charitable deduction was first enacted into the federal tax code in 1917 as a way to possibly incentivize charity. Yet here we are in 2010, still arguing about whether reducing that incentive for the very wealthy will result in any drop-off in giving. Shouldn’t we know by now?

In 2009, President Obama proposed lowering the tax break given to the wealthy who donate from 35 percent to 28 percent in his federal budget for 2010. The idea was that additional revenue to the federal government – up to $318 billion over a 10-year period – could be used to help the economy. Echoing a view Republicans have long held, the president indicated he didn’t believe tax codes were the impetus for charitable giving. He also indicated that institutions and nonprofits are better served by a prospering economy rather than by tax breaks. He’s right.

His plan has drawn a range of responses. An article of faith among liberals is that the higher the marginal tax rate, the greater the incentive to make donations, while conservatives traditionally oppose higher taxes and claim that people make charitable gifts because of a desire to help some cause in which they believe.

But if you sift through the countless discussions, essays, and data collected over the past 93 years, there is no strong evidence to believe the tax code might have any appreciable effect on the willingness of people to make donations to charitable organizations.

Unfortunately that hasn’t stopped nonprofit observers from hitting the panic button. The Center on Budget and Policy Priorities expressed worry that charitable gifts might decline by 1.3 percent. And the Center on Philanthropy at Indiana University apparently ignored its own 2006 groundbreaking study: It estimated that overall giving would decrease 2.1 percent, and that donations by the highest-income households would drop even more, to 4.8 percent, resulting in a loss of $3.87 billion to charities. Some went so far as to call the proposal “a stake in the heart.”

But these numbers and this worry are based in fear and clouded by politics. The most comprehensive survey to date of the philanthropic behavior of wealthy Americans, the 2006 study by the Center on Philanthropy at Indiana University, found that wealthy donors were reporting that even major tax policy changes would actually not affect their giving. The principal author of the study, Patrick Rooney, conceded that certainly “[p]eople respond to incentives, and when you take away from donors the appreciating value of property they would donate, they may look to alternatives, such as selling.” But it’s important to note that when you sell something, it means that the taxpayer has to pay a capital gains tax, which in turn generates revenues that can fund social services, benefiting all of us.

We’ve been here before. The 1986 Tax Reform Act was also heralded as a catastrophe for charities: The Independent Sector, a coalition of nonprofit foundations and charities, led the charge against the legislation, predicting an $11 billion reduction in donations due to lowering the top marginal tax rate from 50 percent to 38 percent – reducing the value of a donation by 24 percent – and the elimination of the nonitemizer deduction for charitable contributions.

The catastrophe didn’t happen. In fact, a year after the law’s enactment, according to Independent Sector, nonprofit groups recorded a cumulative 10 percent increase over the year before, maintaining the same ratio that held steady throughout much of the 1980s.

Similarly, consider the recent gradual elimination of the estate tax. The amount exempted increased from $675,000 in 2001 to $3.5 million in 2009 but has not diminished the willingness of wealthy collectors or their heirs from donating property to charitable nonprofit institutions. Museums continue to report substantial bequests and gifts from heirs.

“Certainly,” as Andrew Finch, senior director of government affairs for the nonprofit advocacy group Americans for the Arts put it, “people give because they want to give.... Altruism exists.”

Nonprofits should take heart.

Economists of all stripes agree that the tax code determines not if people make donations but how and when, and serves to organize the process of charitable giving rather than determine whether or not it takes place.

Currently, Mr. Obama’s proposal, an idea presented as a way of paying for expansion of the healthcare initiative, is just one of many sitting to the side while the wars in Afghanistan and Iraq take center stage. But as Washington considers the 2011 federal budget and faces the reality of another year in our current economic situation, tax increases will be considered once again.

Obama shouldn’t be distracted by the predictions based purely on fear and by those running the numbers based on economic models. Rather, he should press on with his idea of lowering the tax deduction for the wealthy as it’s based on how individuals actually behave. In Europe and Canada, taxes are higher, but there are far more government-run social services and, compared with the United States, quite minimal individual giving. Americans don’t need a government subsidy to be kind to fellow citizens.

Daniel Grant is the author of “The Business of Being an Artist.”

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