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The charitable sector understandably frets over the fate of the charitable deduction as pols in Washington tumble towards the fiscal cliff. But as my Philanthropy Daily colleague Jeremy Beer notes, one wise donor has pointed out a devil’s bargain that too many advocates for charities are willing to make in their campaign to protect the charitable deduction.

Writing in the Wall Street Journal, Kimberly O. Dennis, head of the Searle Freedom Trust (and a supporter of Philanthropy Daily), skewers the illogic of groups like the Independent Sector, which explicitly endorse President Obama’s lust to raise taxes on the wealthy, even as they also plead to keep the charitable deduction untouched.

This combination of policies is entirely unlikely to protect—much less increase—actual giving to charities. Dennis points out the well-established fact that for decades Americans have given away about 2 percent of their disposable income, which has also equaled roughly 2 percent of GDP. That was the case in 1974, when the greedy government demanded a top marginal tax rate of 70 percent, and in 1989, when the top rate was 28 percent.

I wish American giving were higher than those 2 percents, but at least we are far more charitable than Europeans. As Arthur Brooks points out,

Per capita, Americans give three and a half times as much as the French, seven times as much as the Germans, and 14 times as much as the Italians.

Those numbers should wake up anyone in the charitable sector who imagines that a big welfare state in a secularized nation is a recipe for nonprofit flourishing.

The same people may also want to peruse an essay co-written by Sandra Swirski of the Alliance for Charitable Reform and myself. As our subtitle warns, "a growing government undercuts American philanthropy":

One study cited by [the Congressional Research Service] estimated that government largess typically "crowds out" private donations by around 56 percent. That means every $1,000 in government grant money can reduce private donations by $560.

In short, if you care about the health of America's charities, you should be worried about more than the shape of our charitable tax deduction. You should take a keen interest in the shape and size of the governmental sector.

Given the seemingly Iron Law of 2 Percent, charitable giving will only grow if disposable income and our GDP grow. Dennis is right to insist that

If nonprofits knew what was good for them, they would be focusing less on preserving the charitable deduction and more on economic growth and wealth creation. As the dreaded fiscal cliff approaches, they should be lobbying for a tax system that lowers rates and eliminates loopholes, allowing capital—including charitable capital—to flow to its most productive use. The resulting prosperity would do much more for charities than preserving their own special carve-out from a punitive tax structure.

FOOTNOTE: For all the details on the charitable deduction fight, visit the page devoted to it at the website of Alliance for Charitable Reform.


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