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2017 marked the centennial of the passage of the War Revenue Act, which introduced the charitable deduction. Here’s the story.

“In America, as perhaps nowhere else in the world,” declared an editorial in the Boston Transcript on June 29, 1917, “educational and philanthropic institutions have been built up and maintained by private subscription.”

The article goes on to argue that in other countries “of slower development” than the United States, welfare work and social services have had to be taken up by government organs, whose resolve (and funding) tends to dry up during times of war.

In America, though, it seems quite the opposite: The American war effort (note the date of the Transcript editorial—soon after America’s involvement in World War I) prompted greater investment in educational, scientific, and welfare institutions by the government. As a result, these institutions grew, as did people’s dependence upon them. Public universities, humanitarian charities like the Red Cross, and research groups all stepped into the limelight—not out of it—during America’s hour of need. 

And even while these local and civil institutions came to the fore of public life, they faced immense demands upon their resources. It was into this context that lawmakers considered what came to be called the Hollis Amendment to the much-debated War Revenue Bill of 1917.

Presented by Senator Henry F. Hollis of New Hampshire, the amendment proposed the introduction of a charitable tax deduction of up to 20% of the donor’s net income as an incentive to encourage private funding of “religious, charitable, scientific, or educational purposes, or to societies for the prevention of cruelty to children or animals.”

(That ceiling was eventually lowered from 20% to 15% after another amendment by the long-serving senator from North Carolina Furnifold McLendel Simmons, but Hollis won the day overall.)

In arguing for the charitable tax deduction, Hollis sold it as a defensive maneuver. The war effort had required the introduction of a heavy income tax (the rate of tax for those in the top income bracket—$2 million and above—rose from 15% to 67%), and Congress would need to open a pressure valve if it wanted to keep private charitable dollars flowing. Hollis explained it thus:

“Usually people contribute to charities and educational objects out of their surplus. After they have done everything else they want to do, after they have educated their children and traveled and spent their money on everything they really want or think they want, then, if they have something left over, they will contribute it to a college or to the Red Cross or for some scientific purposes. Now, when war comes and we impose these very heavy taxes on incomes, that will be the first place where the wealthy men will be tempted to economize, namely, in donations to charity. They will say, ‘Charity begins at home.’”

It was to prevent this contraction of civil society that Hollis sought to introduce the deduction. Still, some worried that this measure would only empower the super-rich to cheat the public coffers of much-needed income tax. Hollis turned that calculation on its head:

“Look at it in this way: For every dollar that a man contributes for these public charities, educational, scientific, or otherwise, the public gets 100 per cent; it is all devoted to that purpose. If [however] it were undertaken to support such institutions through the Federal Government or local governments and the taxes were imposed for the amount they would only get the percentage—5 per cent, 10 per cent, 20 per cent, or 40 per cent, as the case might be. Instead of getting the full amount they would get a third or a quarter or a fifth.”

A dollar donated directly to the schools that trained recruits, the charities that supported war widows, and the institutes that developed relevant scientific research goes further than the same dollar if it must slowly work its way through a federal bureaucracy. Quicker and more efficient to just cut out the middle man, Hollis figured—and the Senate agreed.

Something of Hollis’ wisdom might still remain intact a hundred years after the passage of the War Revenue Bill (ratified October 3rd, 1917). Civil society plays an active and pivotal role in American public life, most of all in times of great national stress.

2 thoughts on “The charitable tax deduction turns 100”

  1. George McCully says:

    That’s easy: the situation Mr. Hartsook alleges—”never”—does not exist. Funds given to DAFs have always been transmitted to charities, most often sooner (within five years) than later. Both the donor and the DAF sponsor have strong incentives to make that happen.

  2. Bob Hartsook says:

    Thanks for the history lesson. Now tell me how giving to a donor advised fund which never has to be given to direct service, satisfy this legislative history?

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