The Charitable Deduction: Then and Now

There are two intriguing and important recent articles about the history of the U.S. charitable deduction and how it can – and should – evolve in the future. 

The first paper is by Dr. Nicolas J. Duquette: Founders’ Fortunes and Philanthropy: A History of the U.S. Charitable-Contribution Deduction (August 27, 2019), Cambridge University Press.  Professor Duquette argues that, despite significant changes in the philosophical underpinnings and textual provisions over the 100 years of the federal charitable deduction, it remains now – as it began – a benefit for the rich. 

The second article is Charitable Tax Reform for the 21st Century (September 16, 2019) by noted tax-exemption scholars, Professors Ray Madoff and Roger Colinvaux.  They argue that the current – generous – tax incentives for charitable giving are “woefully out of step with their purpose and the realities of charitable fundraising today, resulting in a system that is incoherent, ineffective, and on the verge of failure.”

Charitable Deduction History

Nic Duquette is an assistant professor at the USC Sol Price School of Public Policy with expertise in nonprofit economics, public finance, and economic history. His research “uses the tools of economics, politics and history to trace the development and behavior of nonprofit organizations, and he teaches courses in nonprofit management informed by an interdisciplinary perspective.” 

In Founders’ Fortunes and Philanthropy, Dr. Duquette presents 32 pages of text and charts that trace the 100-year history of the federal charitable tax deduction and, more broadly in time and scope the origins and development of philanthropy in the United States.  This is a deep-in-the-weeds scholarly tome, important especially for those interested in shaping the next 100 years of charity tax policy. 

He describes his objectives as contributing “… to two bodies of literature.” The paper “… incorporates the importance of the U.S. tax system into the literature on the history of philanthropy, and it provides the literature on the economics of tax policy and charitable giving with the historical context it currently lacks.” 

Happily, there are reviews and summaries, the most helpful of which is The charitable deduction is mostly for the rich (September 3, 2019) by Kelsey Piper writing for Vox. See also Why the Rich Get Charitable Deductions and Everyone Else Can Suck Eggs (September 4, 2019) by Ruth McCambridge of The Nonprofit Quarterly and Tax History: Charity Deductions Are for the Rich — and That Was Always the Plan (September 19, 2019) by Professor Nicholas Mirkay of the William S. Richardson  School of Law at the University of Hawaii at Manoa.  

But the takeaway of Dr. Duquette’s work should not a simplistic conclusion that the charitable deduction has been, and continues to be, for the very rich. It’s more nuanced and complicated. 

    Charitable Deduction Future 

Professors Roger Colinvaux (Catholic University) and Ray Madoff (Boston University) are well known to the nonprofit community for their insightful commentary. They published Charitable Tax Reform For the 21st Century (September 16, 2019) at 164 Tax Notes 1867 (paywall). It is now available online, free-of-charge from the Stanford Social Innovation Review at https://ssrn.com/abstract=3462163.

In this 10-page article, they argue that the Tax Cut and Jobs Act of 2017’s expansion of the standard deduction as well as the dramatic jump in popularity of donor-advised funds in recent years have combined to compromise what they assert should be the legitimate policy goals of charity tax incentives. 

What are these twin “overarching policy” aims? First, to promote “actual charitable work.” Second, to foster “a strong culture of charitable giving with broad participation.” Compare these goals with the actual historical record as shown in Professor Duquette’s paper. Professors Colinvaux and Madoff explain that charities “play a fundamental role in American society,” doing the job that otherwise would fall to the government. Moreover, they perform this function with “creative solutions to society’s most pressing problems, and serving our highest ideals.” 

But the design of the federal government’s current tax scheme is inconsistent with these goals and badly broken and unfair. They recommend several reform proposals including: 

  • Expanding the “giving incentive” in the form of credit and with a “giving floor”
  • Changing the timing of tax benefits to DAF donors; and
  • Closing foundation loopholes and fostering more spending.

   Conclusion

For anyone who plans to spout off in the coming weeks and months about what should be done with the charitable deduction – and more so for policymakers who will be directly involved in decision-making – these two articles are critical reading.

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