Earlier this month, Republican Sen. James Lankford of Oklahoma and Democratic Sen. Chris Coons of Delaware introduced what they’re calling the Charitable Act. The legislation would allow taxpayers who do not itemize their deductions to claim a deduction for charitable giving of more than $4,600 for an individual and over $9,200 for married couples filing jointly in the 2023 and 2024 tax years. In the 2020 tax year, the most-recent one for which such a figure is available, more than 90% of federal tax-filers did not itemize their deductions.
The proposed Charitable Act likely will healthily renew and heighten consideration of charity and the role of government, if any, in encouraging it through tax policy in the public discourse.
Recently, longtime philanthropy official Jeff Cain’s contribution to The Giving Review symposium on “Conservatism and the Future of Tax-Incentivized Giving” noted that
Long before the Revenue Act of 1917 created a tax deduction for charitable contributions, Americans gave to charity and formed voluntary associations of every kind. The genius of American philanthropy, it is often said, is that nearly all Americans, of every income level, give. But the tax-exempt portion of the Internal Revenue Code is not for all Americans.
American charity, according to Cain’s January article, “The rise and decline of Big Philanthropy in America,” “pre-dated the creation of the Internal Revenue Code and the federal income tax. It didn’t need to be ‘incentivized’ into being by government tax policy. Charitable exemptions in the Internal Revenue Code are for those few Americans who practice philanthropy, not the many who practice charity.
Everybody, he later writes in the provocative piece, “knows that for the overwhelming majority of Americans, the charitable deduction is meaningless. An above-the-line charitable deduction is a cynical Beltway strategy to protect tax-incentivized Big Philanthropy by redirecting the reform conversation away from meaningful change. It’s a game”—one that would and should end with “ending charitable tax exemptions of every kind,” he boldly concludes.
In her post-symposium conversation with The Giving Review last month, the Philanthropy Roundtable’s Joanne Florino—who also contributed an article to the collection, “Forgo mandates and work to change philanthropy through excellent grantmaking”—noted that
of course American charity preceded, predated the charitable deduction, but it also predated the federal income tax. The charitable deduction was put in place because of an increase in the federal income tax at the time of World War I so that people would not be deterred from making charitable gifts during a time when their taxes were higher.
A decade ago, the Hudson Institute’s Bradley Center for Philanthropy and Civic Renewal hosted an event similarly raising fundamental questions about the charitable tax deduction, including its place in American political thought. As Hudson senior fellow and Bradley Center director William Schambra, now a Giving Review co-editor, asked in his introduction to it: is the deduction just another provision of the tax code, or is it a reflection and reinforcement of the American character?
The almost 90-minute, April 2013 discussion, “The Charitable Deduction in American Political Thought” is viewable below.
Schambra also noted that attacks on the charitable deduction were cross-ideological and bipartisan. In 2012, he said, Democratic President Barack Obama had again proposed a budget that would decrease the deduction for those earning more than $250,000 a year from 35% to 28%, and Republican presidential nominee Mitt Romney proposed capping all tax deductions more generally at 17% to widen the tax base and get government out of engineering who gets what tax benefits. Romney did not list particular deductions that he’d limit—thus essentially pitting the value and importance of the charitable against the mortgage-interest against the health-insurance against the state-tax deductions, among others, in the public discourse about his plan.
“The Charitable Deduction in American Political Thought” featured Alexander L. Reid and Rob Reich. Reid is now a partner at the BakerHostetler law firm. Reich is a Stanford University political scientist and author of Just Giving: Why Philanthropy is Failing Democracy and How We Can Do Better, among his many books.
Reid’s presentation was based on his essay “Renegotiating the Charitable Deduction,” published in Tax Analysts in January 2013. effects. “The charitable deduction and charitable income tax exemption are provisions of the federal tax code, but their purpose transcends tax policy,” Reid writes in the piece.
Together they form a boundary between the state and civil society. The principles of federalism prevent the states from taxing the federal government and the federal government from taxing the states, because, in the immortal words of Justice Marshall, ‘the power to tax involves the power to destroy.’ The charitable deduction and income tax exemption should be thought of in the same manner—as a form of tax immunity that protects civil society from the government.
Proposals like Obama’s and Romney’s are motivated by “a confusion between the purpose of the charitable deduction and its economic effects,” according to Reid—as would be, one can presume he’d believe, Cain’s. “The purpose of the charitable deduction is to ensure government neutrality toward civil society despite the imposition of the income tax. As a consequence of this neutrality, the charitable gifts are less costly than they would otherwise be.” But the confused “[p]roponents of reform … believe that the purpose of the charitable deduction is to provide a government subsidy to charitable gifts, a view that entitles the government to adjust the subsidy as it sees fit.”
The charitable deduction “removes charitable gifts from the tax base, giving donors their own money back. It thereby implements a policy of neutrality,” Reid thinks. “Viewed in this way, the deduction is an accounting mechanism not a subsidy.”
At its most-integral level, the tax attorney continues, “the issue of whether charitable contributions should be included in the tax base is a matter of values as much as it is about economics—it is a question of what the relationship should be between citizens and the state in a democracy.”
Just as Cain contemplates and Florino acknowledged, Reid writes that “[i]f the charitable deduction were eliminated, Americans would no doubt continue to give generously. But that is not the point,” he concludes.
The charitable deduction does not exist to subsidize giving, even though it makes giving less costly. Its purpose is to limit government interference with our right to engage in activity that directly furthers the public interest. It is a mechanism for ensuring that the government does not lay claim to something it should not own: income earned by the people, controlled by the people, and devoted to the good of the people.
The charitable deduction is a negotiated bargain between citizens and the state, establishing a delicate balance of power.
Reich’s remarks at the 2013 Bradley Center event echoed the argument in his “Toward a Political Theory of Philanthropy,” which was a chapter in 2011’s Giving Well: The Ethics of Philanthropy. Like Cain, Reich reminds us that the charitable deduction was created by Congress in 1917. Like Florino, he reminds us that this was shortly after the introduction of federal income taxation in 1913.
“[P]hilanthropy is not an invention of the state, but ought to be viewed as an artifact of the state; we can be certain that philanthropy would not have the form it currently does in the absence of the various laws that structure it and tax incentives that encourage it,” Reich writes.
“Contemporary practice, in which philanthropy is structured by a regulatory framework of incentives, is not the norm, but the historical anomaly,” Reich observes, consistently with Cain. “Previously, the state protected the liberty of people to make donations of money and property, but did not provide incentives for doing so,” Reich continues. “Two natural questions arise: Why have such incentives and what is their justification in a liberal democracy?”
Perhaps conceptually similar to Reid’s desired “neutrality” in charitable-tax policy, the political scientist Reich urges a “noninterventionist” government policy on charity. “The default position of a liberal democratic state regarding charitable giving, it seems to me, ought to be strict nonintervention: Individuals should possess the liberty to give their money or property away to whomever or whatever they please,” by his framing. “Restrictions on that liberty … stand in need of justification”—just as “incentives for people to exercise their liberty to give their money away also stand in need of justification; the state bears the burden of showing why such incentives are desirable and consistent with justice.” As would Sens. Lankford and Coons, one can presume Reich thinks.
Reich examines three justifications for the incentive of the deduction, which he considers a subsidy—presumably confused about its purpose, one can assume Reid would think. The first reason for the deduction that Reich looks at is “that the deduction is necessary to account for the proper base of taxable income” and is thus not a subsidy at all, as Reid also thinks.
The second deduction rationale Reich explores is “that the deduction efficiently stimulates the production of public goods and services that would otherwise be under-supplied by the state,” which thus subsidizes that production through the deduction. The third “links the incentive to the desirable effect to decentralize authority, to some degree, in the production of public goods and, in the process, to support a pluralistic civil society in a flourishing democracy”—a sentiment to which Reid strongly appeals, as well, remember.
“Although I find nothing to recommend the tax base rationale,” Reich concludes,
the subsidy and pluralism rationales do offer potentially good reasons to support subsidies for philanthropy. Neither of these latter two justifications, however, provides support for the actual design of most tax-subsidized giving, where a wide array of eligible recipient organizations and a tax deduction for giving are the favored mechanisms. A political theory of philanthropy might offer a defense, or several distinct defenses, of state incentives for giving money away, but the current practice of state-supported philanthropy, especially in the United States, is indefensible.
On March 29, AmPhil’s Center for Civil Society (C4CS) will host a “Givers, Doers, & Thinkers” webinar on the charitable deduction. Moderated by C4CS director of education Jonathan Hannah, the discussion will feature Philanthropy Roundtable senior director of policy and public affairs Elizabeth McGuigan and American Enterprise Institute senior fellow Howard Husock.