NYT Op-Ed Critiques Charitable Tax Deduction

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December 6, 2013; New York Times

Boston College law school professor Ray Madoff has been vocal recently as a critic of donor-advised funds as warehousing charitable donations, but in this New York Times op-ed, she expands her critique to examine the structure of charitable giving overall. Her point is that the charitable deduction benefits charities that may not benefit the truly needy.

The cost to the federal treasury for charitable donations is, she says, $40 billion this year, and a half-trillion over the next ten. “What is the public getting for this investment of resources?” Madoff asks. “Sadly, not enough.”

She offers three examples of charitable donations “that offer little or no benefit”: nonprofit hospitals whose “activities are often indistinguishable from those of for-profit hospitals…and, in fact, many nonprofit hospitals provide less charity care than their for-profit counterparts”; conservation easements often claimed by “developers of high-end housing communities…for their private golf courses”; and donor-advised and private foundations whose “money can languish in these entities for decades or even centuries…. Donor-advised funds have no payout obligation, and private foundations, which are technically required to distribute at least 5 percent of their asset value each year, can meet that requirement simply by making distributions to donor-advised funds.”

Madoff presents easy fixes to these problems—requiring nonprofit hospitals to provide charity care, prohibiting golf course easements (which President Obama has also proposed), requiring DAFs to pay out within seven years, and prohibiting private foundations from meeting payoff requirements by giving to DAFs—but she suggests that there are other problems.

She takes aim at the charitable deduction lobbying effort, which “purports to represent both donors and charities [but]…has focused its efforts on preserving the maximum charitable deduction for donors, while paying scant attention to closing the loopholes that divert resources away from true charities.”

Madoff’s argument is simultaneously compelling and confusing. On one hand, she is challenging Congress and the nonprofit sector to “curb…wasteful charitable deductions,” by which we think she means charitable giving that doesn’t reach frontline charities and provides unneeded benefits to wealthy donors (such as golf course developers). On the other, she focuses on some items that are proportionately small within their charitable subcategories, such as $90 million of grants by private foundations to donor-advised funds, though foundations are estimated to have distributed over $50 billion in 2012 and sit on well more than $600 billion in assets. She is concerned about the $45 billion DAFs managed by corporate sponsors and community foundations, with payout rates higher by triple or more than private foundations, warehousing charitable donations, but why not be equally concerned about the pathetically low payout rates of foundations, or about the choices of charities that private foundations make?

Nevertheless, Madoff is challenging the charitable sector to think more deeply about the charitable deduction. Should it exist as is, or be modified to require more from some charities because of their ability to meet important social needs? —Rick Cohen

  • Eileen Heisman

    Thanks Rick. Donor advised funds payouts (percentage of assets that are granted out) have been in excess of 14 percent for years and have been as high as 17 percent. Ms. Madoff seems to conveniently ignore those high numbers. The DAF payouts do not include the overhead expenses it take to run the charitable organization managing the DAF.

    Compared to the 5% payout private foundations are required to make (and their 5% can and does include overhead), DAFs provide a much more aggressive grantmaking. However Ms. Madoff only seems to focus on regulating DAFs and not on their abundant existing grantmkaing numbers. National Philanthropic Trust has raised 3. 8 billion dollars in seventeen years and has granted HALF of that out to charitable organizations all over the country and the world.

    I wish she would be more clear about why DAFs are so unattractive to her. Her consistent criticisms over the last severl years certainly bring her media attention. But I agree with you, I am not sure she is making a persuasive argument.