Debate Over Tax Deductible Charitable Contributions Heats Up

The Chonicle of Philanthropy yesterday summarized my critique of NY Times reporter Stephanie Strom‘s front-page hatchet job on tax deductible donations.
At the end, the Chronicle asked:
Do you think donors should get a tax break for gifts to arts groups? Share your thoughts by clicking on the comment link below.
As of this writing, they’ve received one comment—from Stephanie Strom herself:
How Ms. Rosenbaum knows my opinion of social service organizations and cultural institutions is beyond me. She never contacted me to ask. Rather, she chooses to attribute opinions to me that were expressed by others in the story—in their words, not mine—and expresses opinions of her own in characterizing the temperature of my prose.
I didn’t need to ask her opinion; it was already clear from the way in which she privileged certain “opinions that were expressed by others” in crafting her story. You can judge for yourself.
Strom’s point of view, favoring social service organizations and looking askance at tax deductible donations for cultural institutions, was manifest not only to me, but also to other readers, including Christian Kleinbub, assistant professor of art history at Ohio State University, who informed me that he had e-mailed a letter to the NY Times on Friday, the day after Strom’s article appeared. (The newspaper has still not seen fit to publish any letters reponding to her piece.)
Kleinbub, somewhat revising what he sent to the Times, wrote:
Stephanie Strom’s piece was sloppily argued and made questionable assertions about philanthropy. She makes clear that the only charitable giving that the she condones is that aimed at impoverished Americans. Apparently, she thinks that if philanthropists were fully taxed on their gifts, their money would go directly to the poor. Is she kidding? I have the impression that our elected government cares less about the poor than even her rich philanthropists do.
If we want a country that values democratic ideals, not to mention the good of the mind and body, we may just want to see more money thrown at the universities and cultural institutions that do the most to spread them. Increasingly, they have assumed responsibility for the higher ideals of our society.
And here’s a long, thoughtful CultureGrrl BlogBack from Linda Sugin, professor at Fordham Law School:
A public debate on the charitable contribution deduction is overdue, and I applaud you and Stephanie Strom for starting it. I agree and disagree with you both.
Strom’s conclusion that the government forgoes $1 revenue for every $3 given to charity, and your response to her both miss an important aspect of the charitable contribution deduction: that it is both a subsidy and an incentive, and that its desirability as a matter of public policy depends on how people respond to it. It is a subsidy to organizations and/or their donors, depending on how successful it is as an incentive; the more people increase their contributions on account of the deduction, the greater is the subsidy to the organization. If people give what they would have given without the deduction, it is a subsidy to them as taxpayers.
Strom seems to assume either that donors do not respond to the charitable deduction or that they would substitute taxable activities for charitable contributions. That is how she can argue that the government would collect $1 for every $3 given to charity. But that is not necessarily true; donors might neither contribute nor pay tax. They could take those dollars and contribute them to their own tax-free retirement accounts, defer realization of their investments, or choose a wide variety of strategies (readily available to the rich) in which they would neither give to charity nor recognize taxable income.
Your comment that organizations would fold if government didn’t support them directly assumes that donors would respond to repeal of the charitable deduction by withholding support from those organizations. Like Strom’s argument, yours depends on the elasticity of charitable giving. Low-income taxpayers regularly contribute (mostly to religious organizations), in spite of their lack of tax benefit. The wealthy may be more responsive to tax preferences, so you may be right to be particularly concerned about the effect of a charitable deduction repeal on arts organizations, favored charities of the rich (as are universities, my personal favorite).
But if enough wealthy donors are committed to their causes, or if they are willing to continue paying with after-tax dollars for the prestige in the community that large donations confer, then they may continue to give at their prior levels, even without the deduction. The most likely result of repealing the charitable contribution deduction is that donors would pay somewhat more tax and give somewhat less to charity.
If people are very responsive to the deduction, then you can make an efficiency argument in its favor: The government may forgo $1 in revenue, but save $2 on services it would otherwise have provided that the charity now provides. The only way the revenue loss is a pure cost is if we would not fund the underlying recipient at all with public money. Nevertheless, I wouldn’t relish trying to prove the assertion you make that the public gets $3 value for every tax dollar foregone. If organizations had to prove they were efficient recipients of tax-deductible dollars or lose their preferred status, many would be in trouble, since the activities of the wide array of 501(c)(3) organizations do not easily translate into measurable dollars of public benefit.