A proposal made in December by President Obama's National Commission on Fiscal Responsibility and Reform would replace the charitable giving tax deduction with a tax credit available to all taxpayers, regardless of whether they itemize deductions on their returns. The credit is only available to people whose total donations equal more than 2 percent of their adjusted gross income – and only about half of all taxpayers give that much.
Worried nonprofits have suggested that this would cause giving to dry up at a time when they can’t afford any more setbacks. I disagree. The charitable giving tax deduction should go, and here’s why:
Many years ago, I had a chance to ask a dentist for a very large donation to an organization I was working for. As is often the case when asking for money, I learned a lot about his philosophy of giving. We had in common being religious and believing that the Bible commands that everyone “tithe” a portion of their income.
A “tithe” is commonly understood as 10 percent of your income, but more important than the percentage is the notion that you are not giving away anything but rather that God has given you everything and you are to return 10 percent to the common good. Further, you are to give the first 10 percent – the first crops, the first paycheck, the first livestock.
This man said, “I give 20 percent because the first 10 percent is not mine to give – that is owed to God. The second 10 percent is my true gift because I don’t have to give it, but I want to.” At 20 percent of a very successful practice, this man gave away about $50,000 every year. He was African-American and laughingly, if ruefully, told a number of stories about sending large amounts of money to various organizations, then having fundraising staff or board members come visit him to thank him or to ask for more, only to have those people be completely shocked that “a man of my race could attain a station in life to be able to give such a big gift.”
He had been honored once at a Gala. When he walked in, the Chair of the Gala, an older white woman, said, “Are you Dr. Smith’s driver? Does he need any help coming up the stairs?” He said, “I feel sorry for these people. I am not surprised by them, but they are surprised by me. It is not up to me to judge them; someone with way more power and insight will do that eventually. I am to love them, which is a lot harder than judging them.”
I thought of him recently because another thing he told me is that he never declared his charitable giving on his taxes. “Why should the government have less money because I am doing what I am commanded to do? I am supposed to pay taxes also – not reduce my taxes by my giving.”
I completely and totally support the proposal for broad base tax reform that includes getting rid of the charitable deduction for giving. Seventy-one percent of Americans receive no tax benefit for their giving because they don’t exceed the standard deduction and they file a short form. One of those 71 percent is my mother. She owns her house free and clear and has no other deductions so despite the fact that she gives often and generously, close to or surpassing the Biblical 10 percent, her tax bill is not reduced.
Contrast to someone I know who earns $250,000 per year, gives at most $2,000, declares all of it and proudly announces “It only cost me $1,200.” Richard Thaler, writing in the Dec. 19, 2010, edition of the New York Times, calls this, accurately I think, a tax subsidy. The government is subsidizing wealthy people’s giving while ordinary people (the majority of people) get nothing.
Of course many charity leaders are squawking that getting rid of the charitable deduction will be another body blow to nonprofits. In fact, it will be a minor scratch to the people who receive tax benefits for giving. And one such person who receives tax benefits for giving is me. I own a house, I have a mortgage deduction (which I also think should be abolished) and my partner and I give away 5 percent to 10 percent of our income. I am more of a hypocrite than my dentist friend so I have always declared my giving.
Thaler and others have suggested that if the government must incentivize people to make gifts, at least make the tax advantages of charitable giving fair. Changing the deduction to a credit could easily do this, as the Obama administration has recently suggested. A credit comes off of income for everyone and would be capped at some amount – say 15 percent. If I give $1,000 and my income is $10,000, I save $150. If I give $1,000 and my income is $100,000, I also save $150.
The charitable deduction will be much debated in the next period of time. It is very important that those of us who work in and for nonprofits think through what we believe about whether we should be able to save on our taxes while patting ourselves on the back for being charitable, or whether giving should be its own reward.
Kim Klein is a fundraising consultant at Klein & Roth. She is the author of five books including her most recent, "Reliable Fundraising in Unreliable Times". Her classic, "Fundraising for Social Change," is now in its fifth edition. She writes a blog for the Building Movement Project called Kim Klein and the Commons where this column was originally published.