Tax breaks for wealthy donors: Schools struggle, while the rich fund golf tourneys

US generosity, and its network of charitable giving, comes with baffling inefficiencies. That’s no secret. But consider, too, that for every dollar donated and deducted by wealthy taxpayers paying taxes at a 35 percent marginal tax rate, the US loses 35 cents of potential income tax revenue. While the government struggles to provide essential health and education services, with tax breaks, wealthy Americans are funding both Planned Parenthood and the Pro-Life Action League, the American Petroleum Institute chapters and the Sierra Club, churches and mosques.

Charitable giving is a good and admirable part of the American spirit, but charities can also serve as tax havens for the wealthiest citizens. Tax deductions for charitable giving effectively put the public good in the hands of wealthy donors and their pet causes – at the expense of government revenue for the fair and reliable provision of services.

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Charity is a growth industry. More than 1.5 million tax-exempt organizations are registered in the United States. According to the National Center for Charitable Statistics, more than 180,000 public charities were established before 1969, and more than 350,000 were founded during the past decade. But giving is down since reaching record highs in 2008. In 2009, households with more than $200,000 in income, or $1 million in net worth, reduced their giving by 35 percent since 2007, according to a report from Bank of America and the Center on Philanthropy. Charities’ budgets are strained, as the recession and a widening wage gap reduce giving but also increase demand for charitable services.

Excesses of entertainment charity

Tiger Woods’ divorce scandal last year exposed the excesses and waste of the entertainment charity industry. Sports stars, celebrities, and politicians create foundations and then arrange lavish fundraisers for wealthy friends. The catch is that celebrities can shift entertainment expenses for alcohol or party hosts to these foundations, which cuts into the foundations’ program budgets. Check out Charity Navigator to see its rating for charities on fundraising efficiency.

Wealthy sports figures aren’t the only ones who raise questions about charitable funding. Politicians have used foundations to funnel corporate donations into constituent handouts or even campaign contributions. The midterm elections last fall shed plenty of light on the loopholes exploited by political action committees and corporate giving.

Hard economic times call for targeted spending rather than a patchwork of organizations with overlapping goals and gaping holes. “Look to the Stars” is an online database of more than 2,400 celebrities and a list of their favorite causes and the charities they support. The list of more than 1,600 charities spans the spectrum of causes from AIDS to animals. From the charitable whims of these celebrities, it is hard to assess what America’s urgent national priorities really are, or should be. With 138 different charities on the list devoted to AIDS work, one has to wonder if a competing, disorganized network of institutions is an efficient, dependable structure for getting vital services out to those who need them.

Ending loophole for the rich

In early 2009, the Obama administration tried limiting charitable tax deductions to pay for health-care reform, reducing the deduction from 35 cents to 28 cents per dollar for couples with more than $250,000 in income. Even though the measure would have raised billions in crucial revenue over the next 10 years, both Democrats and Republicans slammed it.

Newt Gingrich, former Speaker of the House, was among those who opposed President Obama’s proposal to reduce the deduction for wealthiest donors. “[C]omparatively small but abundant charitable institutions are providing services that some politicians feel rightfully belong to the federal government,” he wrote in 2009. “By diminishing churches and charities, the administration fulfills a self-preserving objective of consolidating federal power by creating more taxpayer-funded programs to provide the services churches and charities are currently providing.”

Yet government is still involved. Government grants are central to many charities’ funding. And about 65 percent of revenue for public charities comes from program-service revenues, which includes government fees, contracts, and earmarks. Program-service revenue in 2007 was three times the total revenue from contributions, gifts, and grants, reports the National Center for Charitable Statistics.

Let government ensure the public good

Congress dodges its duty to levy taxes in a uniform way to provide for the nation’s general welfare and make tough decisions on health and other public goods. Instead, it lets wealthy donors make the choices in how to fund the public good. So the billionaire founder of Facebook, Mark Zuckerberg, gives $100 million to Newark Public Schools, while other districts struggle. No matter how worthy a charitable cause is, the public good cannot be left to the preferences of wealthy donors whose charitable giving is encouraged by a tax deduction.

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An open public process, prioritizing projects based on needs, would provide more efficient funding than relying on the whims of a few. Individuals passionate for a particular cause or innovation (or those thrilled to see their family names on a museum, clinic, or university hall) would still give – and should.

Two years from now, Congress will have the chance once again to decide on extending tax breaks for the wealthy. And maybe they’ll come to their senses – that the health of a democratic nation’s people is strengthened by services ensured by tax revenue, rather than the fashions of largesse. Congress must reclaim vital tax revenue by reducing the rate that the wealthy can deduct charitable giving from 35 to 28 percent. This lets Congress prioritize our nation’s needs and fairly meet them. Until then, our society relies on a scatter-shot approach.

Susan Froetschel writes for YaleGlobal Online and is the author of Royal Escape.