Are charities an efficient use of tax deductions

Great Debates
1

There’s a thread going on that asks for the moral implications of Obama’s playing at the margin with the charitable giving tax deduction. I was asked in that thread whether I really thought that someone could be offended by someone else’s tax deduction going to a church the first person didn’t like.

In my example, I was really just coming up with theoretical moral implications (or, at least perceived moral implications of charitable tax deductions. However, it got me thinking about the subject.

This article (You’ve requested a page that no longer exists | Stanford News) claims that most charitable giving doesn’t actually go to those most in need. Also, I know that when telemarketers call to ask you to give to a charity, that’s also very inefficient.

My questions are:

  1. Is a tax deduction a valid way to encourage charitable giving? I may not like (in fact, I may be vehemently opposed to) the charity of your choice, and your charitable giving is, in some sense, directing my tax dollars that way.

  2. Are charities efficient? More efficient than government organizations that try and accomplish similar results? A poster in the other thread mentioned how there is still poverty, even though the government has had the “War on Poverty” for a while, implying, I think, a failure on the part of the government. Well, it’s also a failure on the part of the charities trying to accomplish the same goals, isn’t it?

  3. Are there any studies that suggest that money given to a charity more than makes up for the taxes lost through tax deductions?

I think I’m more in favor of eliminating the charitable deduction, since you should be willing to give to charities either way, right? It is charitable and all. If you give less, but the government has more, then there is more in the budget for whatever social programs, education funding, arts funding, what-have-you, that you were trying to accomplish with your donation. And, we all have a say in whether it’s a valid use of government spending, unlike charities, where we (as taxpayers) only get to set the general rules for establishing a charity.

However, if the government really is less efficient than charities, then I guess there is value lost. Maybe we should tighten up the rules on what a charity is:

  1. Must have % of the money go directly to the people/object you’ve set out to help.
  2. Must, I don’t know, directly substitute for government spending?
  3. Whatever else that would make it better.

Help me figure this out!

2

One distortion I have always thought it brings is that it increases the incentive to donate money, rather than time. I’d like to see the deduction extended to permit a tax deduction for the time one verifiably spends on charitable projects.

3

Define “verifiably”

Also, at what rate woudl you get the decuction? With benefits, I think my hourly rate would exceed $50 per hour for my full time job. Would I deduct that? But, I don’t oay tax on $50 per hour, I pay it on X - 401K deductions, itemized deeductions, and the like, so why should I get to deduct the full hourly rate?

Money you donate goes to the charity and stays there. What if you showed up to help a charity and they didn’t need any help? No deduction for you (or, conversely, perhaps a deduction obtained under questionable circumstances).

4

You’re operating under the incorrect assumption that everything non-profit organizations do relieves the government from doing that activity. There are plenty of charitable organizations performing activities that even the biggest government wouldn’t get their hands in. The government gives a tax deduction to donations to these organizations not because it always decreases the public burden, but because those activities contribute in some meaningful way to society.

5

Unless the US does things differently, that’s always the case. Income tax is based on income, not on hours worked, so you don’t pay tax for work you did for free, just like you don’t pay tax on income earned that you donate.

6

But, why should those contributions that are meaningful to society be tax deductible? Just because it’s non-profit? Who gets to define meaningful?

Do you agree that a tax deduction effectively spends my taxes on your favorite meaningful society contributor? And, my deductions spend your taxes? That tax deductions effectively do spend tax money on those activities (since your or my tax money is not going to the government, but is instead going to the organization of our choice?

If you’d like, we can bifurcate:

  1. Should contributions be tax deductible if they replace other direct government spending (such as food pantries vs. food stamps)?
    1a. Should those have to meet some efficiency standard?

  2. Should contributions be tax deductible if they do to other organizations that are somehow meaningful to society, but not directly replacing government activity. All other non-profits would fall into this category, I guess.

7

  1. This is true of all deductions and *all *government spending. IE, I don’t particularly like your kids, I’d rather my money go to Iraq war, or I don’t particularly care for your clean coal, I want my money to go toward Solar Panel research.

  2. If does not affect your tax dollars at all. The money you pay will remain the same, and will be divided up according the general budget in the same manner, regardless of my donation. Unless you go the ‘money is fungible route’, in which case, it’s not longer ‘your’ money.

8

Because I believe the second to be true, I don’t see a need to split it up. Encouraging non-profit activities and organizations is beneficial to society, whether they replicate/replace/supplement governmental duties or not. Sports organizations, fraternal societies, religious gatherings, hobby clubs, and other such groups are adding layers to society that aren’t easily duplicated by beaurocracy. I don’t have my Tocqueville handy, but enabling such groups to prosper goes hand-in-hand with preventing the government from regulating (unequally and biasedly against) such organizations.

9

I hope this answers crazyjoe as well.

My problem with the system as is is that it distorts incentives. If I give up my free time, and do $5,000 worth of legal work for a local charity, then the chairty gains $5,000, and I have “lost” $5,000. If, on the other hand, I give them $5,000 to pay another attorney to do the exact same work, then the charity has gained $5,000, I have “lost” around $3,500 or so, and the government is compelled to spring for the extra $1,500 or so.

We use the tax system all the time to incentivize certain behavior, and discourage other types of behavior. I’d argue that being involved in charitable work is a benefit over and above the financial value of the work, and certainly benefits society by more than simply writing a check. It therefore seems a mistake that the tax system disincentivizes such giving, at least as compared to cash gifts.

Of course, any system would need policing, and details would need to be worked out. But that is the case with cash donations/donations of goods.

But to the more general question of the OP, it makes sense to me that we encourage charitable giving regardless (within certain limits, and that is what the IRS rules for determining who is a charity are for) of who the money goes to. Being involved in charity improves the individual, and thereby improves society. As long as we accept the tax system isn’t simply a means of raising revenue, which it hasn’t been for ages, then I would argue a charitable deduction is one of the least controversial ways of using the IRS for “social engineering”.

Now, I would definitely change the grounds that people get charity status. I’d like to see a deduction available (probably capped) for political donations, even to the parties I don’t like… I’d also, as said in the other thread, remove charitable status from religion qua religion. But as a general rule, I consider it money well spent to encourage people to involve themself in society. I just would ike to see the encouragement tilt people more towards personal involvement rather than just check writing.

10

  1. OK, I think you should start a thread about whether kids should be tax deductible. As for clean coal, if you don’t like that, vote the guys out who support tax dollars going to that activity. My point is (I think), we only set general guidelines about what can be a non-profit, and then any charitable giving for that organization is tax-deductible. If I don’t like a clean coal program, I can work to get the senator (or whoever) sponsoring it to lose the next election. However, if I’m offended by a museum showing/censoring artwork I find offensive/interesting, there’s nothing I can do as a taxpayer to prevent my tax dollars effectively supporting that.

  2. That’s clearly not true. If there were no charitable deductions, then the government would get more tax revenue and my tax rates would, to some extent, be lower. However, if the charity is replacing government spending, you may have a point – I was looking for the facts – is it more efficient? Should there be a charity efficiency standard?

11

There are lots of things that are beneficial to society that are not tax deductible. Are you saying that all of those things would go away if giving weren’t tax deductible? That seems like a stretch to me. Are there other countries where that kind of giving is not tax deductible? Do they have fewer sports organizations, fraternal societies, etc.?

I don’t know – perhaps someone with knowledge could chime in.

12

No, I’m not saying they’d go away. But they would certainly decrease. I’m a bit removed from my “Civil Society” courses to comment at the moment. If it’s a topic you find interesting and want to do some research on your own, I’d recommend Robert Putnam’s “Bowling Alone”, which is a pretty easy read.

13

This is definitely a fair point, and I thank you for addressing the OP directly. I did leave open the possibility that charitable giving can be good, but maybe we should redefine who should get deductibility status.

I know that we use the tax code for all kinds of social engineering, and I understand the need for that. The way it’s currently implemented, though, seems too wide open for my taste (fraternities, museums, colleges, and so on – just look at that long list of potential places that a previous poster uses to support the tax deduction.

14

I’m sure this is knowable and has probably already been studied. I searched around for charitable giving, tax deductions, and the effect on society but came up empty-handed. If anyone can point to any stats, I sure would appreciate it.

If tax deductions for charitable giving can be shown to be more effective and better for society, hey, I’m all for a better society. So far, though, I’ve seen a lot of handwaving (“the government is bad at things”) and heartstring-pulling (“what about the local food pantry?”).

Are there no studies that analyze the effect of charitable tax deductions on society, on various parts of society, whatever?

15

I’m a great believer in the role of government, RitterSport. But I don’t think it is as simple as just looking to see if the government can do something. There are benefits to charitable involvement over and above the actual charity itself. Spending part of one’s weekend building a home for Habit for Humanity not only benefits the person who gets the home, it benefits the person doing the building, and society as a whole. No man is an island, and all that… By encouraging people to get involved in community activities, we make society as a whole a better place. Therefore we provide tax breaks for community organizations that may not be the “good works” kind of charities, so as a local non-profit theater group.

16

This is incorrect. Assuming that you normally get paid $50 per hour and have to spend 100 hours to do their legal work:

In the first case, you lose 100 hours, the government gains no taxes, and the charity gains $5,000 worth of legal work.

In the second case, you lose 100 hours (which you exchange for $3,500 + $1,500), then you give that $5,000 to the charity. You lose 100 hours, the government gains no taxes, and the charity gains $5,000, which it then spends on $5,000 worth of legal work.

17

Can you be more specific? In general, I don’t think you’re going to find much - there’s not a lot of comparative data out there, since the US has given 100% tax-deductions on charitable giving for so long. I’ve still a few friends over at the Center on Philanthropy, and can ask for some advice to steer us towards something specific.

18

Hold on…

Lets say there are two scenarios.

a) I perform the work, bill the charity for $5000, donate $5000 to the charity, and claim a tax deduction.

b) I perform the work, and don’t bill the charity.

Now, in a) and b), I have worked the same amount. The charity has received the same amount. The difference is that the government is stumping up $1,500 in (a), and not in (b).

What I am guessing is that if I change (a) to be donate the money, and sit on my fat ass watching SportsCenter while some other law firm does the work, nothing changes in the analysis. Admittedly, I slept for two hours last night and KNOW I am missing something.

In the new (a) I would have 100 hours that I wouldn’t otherwise have. That certainly has a value to me, but I don’t think it automatically balances out, unless I am misunderstanding your argument.

19

No in the first case, the government is not stumping up anything. You have no more or less taxable income than you do in the second case. You have done exactly the same work, and the charity has received exactly the same thing, net. The value of your work for free.

Even if you bring in a third party, and the charity uses your donation to pay them for the work, the government gets to tax the third party and assuming your tax rates are the same, gets exactly the same tax from them as they lost from you.

20

That $1,500 that the government provides is just the $1,500 that was taken from you when you earned $5,000. The government is no worse off than if you didn’t work at all.

It doesn’t balance out because your new (a) has money appearing out of thin air without working for it, which you then donate.