Government Funding or Philanthropy: What’s Better for Society?

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March 28, 2013; Source: Giving Voice (Northwest Area Foundation)

The president and CEO of the Northwest Area Foundation, Kevin Walker, posted his reflections on his participation in the Foundations on the Hill (FOTH) lobbying effort earlier this month.  Like many of his colleagues, he notes that the cosponsors of FOTH (he names only the Council on Foundations) had participants focus on “one single point: preservation of the charitable deduction in the tax code.”

Walker notes that the current deduction allows the top tax bracket a charitable deduction of 39.6 percent, which means a top rate taxpayer making a $100 gift to charity would currently find his or her taxable income reduced by $39.60. Under President Barack Obama’s proposal for a 28 percent deductibility cap, only $28 of that $100 gift would be reduced from the taxpayer’s taxable income. Walker observes, “The notion is that such a cap will bring desperately needed funds into the treasury in a way that wealthier donors can easily afford…but credible research suggests the change would drive down charitable giving.” Walker cites an estimate that the president’s proposal would result in a loss in charitable giving “on the order of $5.6 billion in yearly donations.” Citing the impact of the “Great Recession” on charities, he declares the use of a charitable giving cap “unacceptable.”

In terms of nonprofit funding sources, Walker’s rationale of why to favor philanthropy over government revenues is worth reading and understanding: “charitable giving – neighbor helping neighbor, citizens organizing their own institutions and supporting them ourselves – comes before our obligation to fund Uncle Sam,” he writes. He suggests that is why it is important that the charitable deduction reduces taxable income before subjecting income “to government intervention, including the government’s taxing authority.” He argues that if the “charitable deduction capped at 28% is good enough, then we accept that the government comes first. In this country, the people come first, not our government.”

It is an interesting analysis and an important one to explore. Walker’s argument is rooted in the idea that giving to government (i.e., taxation) is for the sake of government while giving for charity is for the people. Of course, government is supposed to exist to benefit people, too.  Charitable giving goes to 501(c)(3) nonprofits, which also are supposed to benefit people.  However, Walker implies that government is some how less direct and more alien to people than the nonprofit sector.

Perhaps he means to suggest that not all government expenditures are particularly beneficial to people. The government’s massive Pentagon budget, for instance, doesn’t help to feed, clothe, or house people. But does that mean that charitable giving is without expenditures that some might consider less than beneficial to ordinary people? Many would suggest that a large proportion of the charitable giving of taxpayers in the top tax brackets addresses little of basic needs for lower and middle income households in this country. For instance, philanthropic support for an art museum doesn’t help to feed, clothe, or house people, though culture and the arts “feed” people in other ways. Moreover, a very large portion of charitable giving goes not to charity, but to religion, serving exclusive portions of the public for sacerdotal purposes, not community benefit purposes.

We must also remember that, as a societal function, charitable giving that benefits people depends on the decision-making of individual givers. If these givers choose to pay attention to certain societal needs and not others, there is no redress for the latter. For government, however, taxpayers vote. As damaged as the democratic process might be, there is more input and redress available to taxpayers into government’s use of revenues than there is to charity’s or, for that matter, institutional philanthropy’s, use of funds.

If a foundation makes a decision that communities it aims to help dislike or oppose, those communities cannot intervene in the foundation’s decision-making. They cannot elect or unelect the foundation executive or board, or challenge the foundation’s decision in the courts. That is something that the Northwest Area Foundation knows well, due to groundbreaking attempts to challenge a NWAF grantmaking program, implemented by Walker’s predecessor and terminated by the NWAF board, that the courts ultimately rejected in broad terms for a lack of the plaintiffs’ standing, if nothing else.

Ultimately, Walker implies some measure of greater legitimacy and effectiveness to charitable expenditures over governmental expenditures. Is he right? Does the pre-tax deduction confer some sort of primacy on charitable giving over governmental taxation? If so, is 39.6 percent (or whatever the top marginal tax rate might be) sacrosanct, or does a cap of 28 percent undo the theory? If lowering the deductibility to 28 percent means, in Walker’s terms, that “government comes first,” why not raise the charitable deduction to 50 percent, 75 percent, or make it a dollar for dollar deduction, allowing donors to choose whether to support government or charity and religion? If a dollar for dollar deduction is too much, what is the optimum rate for capping the deductibility of gifts to charity and religion?—Rick Cohen

  • fORSD

    Government of the people by the people and for the people. Walker sees taxes as giving to the governmen not to people. The history of cHaritable support for people in need begins with governmnet. Poor houses, and other means of charity were local government functions begun in clonial times. About 1830 state governments began to beome active as reformers, largely motivated religiously,petitioned states for institutions for the “feeble minded” and the mentally ill. About 1870 to 1890 local charitable organizations began to appear, eventually supported by what we now call United Ways. Private charity and vlunteering are very important but I do not want to rely on them as a substitute for my social securiyt, medicaid or medicare or for my local child welfare system. Walker’s point is more anti government than it is a realistic arguement for private charity. John R.

  • Cecilia Stancell

    Very well put, Rick. I have always been uncomfortable with the assumption that everyone in the charitable sector should be against lowering the deductability cap. I believe that many “charitable” activities should be functions of government, and they have to be funded somehow. And there are lots of reasons, well stated here, as to why allowing private citizens (or foundations) to decide on priorities is not always the best idea. I think there are important and more constructive questions we could be asking other than whether or not the world will end if wealthy people can deduct a smaller amount from their taxes.

  • rick cohen

    Dear Cecilia: Thanks for your note. Given that most of the service charities that address basic human needs get a big proportion of their resources from government, your points are very important. However, you’ve also highlighted something that I tried to get into the piece but didn’t state as well as you did. I think there’s been a diminution of the public sphere or public space where decisions are made in the open, in public, allowing citizens collectively, through their elected representatives, to decide on resource allocations. In the U.S., much of what government does is actually not direct funding, but indirect through tax incentives and tax expenditures. As someone who cut much of his professional teeth in the affordable housing and community development industry, I was always concerned that for affordable housing through the Low Income Housing Tax Credit, the major funding mechanism for low-income housing construction and rehabilitation in the U.S., the decisions on what kinds of housing and where the housing should be were determined by the choices of investors seeking the benefits of the tax credit rather than through a public process of direct funding of housing. I’m not so nostalgic to rail against the LIHTC by any means, because without it, affordable housing production would be in the pits, but who can argue that government programming through the cumulative decisions of individual investors is better than a societal response to the housing needs of lower inocme people. Thank you for your input on this article.

  • Dan

    Probably the best, succint critique of the charitable tax deduction debate I have read. Thank you, Rick.

  • Joan Roelofs

    I think you have read my book, Foundations and Public Policy: The Mask of Pluralism, and also my article: “Welcome to the Dark Ages,” re the feudal aspects of our political system.

    Even with government funding, clientalism, feudalism can be dominant.

    However, one observation that I haven’t had the time to explore is that during the 1930s, the Federal Writers Project, and other government funded arts projects supported radical writers and artists. In contrast, the later foundation arts projects regard radicalism as performance art, feminism, identity politics, etc. None threatening to capitalism.

    While the mood of the country changed between 1935 and 1955, I don’t think it can all be attributed to that.

    In addition, in many European countries, the civil servants have been the backbone of the socialist movement. They know how government delivers the goods, without oppression of dissidents, etc.

    I spent 4 years on the board of a well-meaning project, Cheshire Housing Trust. I was asked because of my interest in green building, via my book Greening Cities. The costs, in government grants and loans, volunteer activities, donations, fundraisers, paid staff, etc., was enormous compared to the results: a small group of tenants had lower rents than market.
    I would have liked to have this calculated, but that wasn’t part of the organization.

    There were only a few in a true housing trust, where the land was owned by the organization and the house by the tenant.
    That is a good model, but it turned out that few in that bracket had the capital even for the house price.

    I may not continue with foundation studies, but if I do, it would probably be about foundations and the national security state, so send me any gems on that.
    Joan Roelofs