The Charitable Contribution Deduction: Who Benefits?

A dictionary definition of charity might be: the giving of money or help to those in need. That is certainly a noble gesture, and most would agree that it is appropriate for the government to encourage acts of charity by making them tax deductable. How this form of encouragement works out in practice is rather disheartening. Bruce Bartlett provides a nice discussion of this tax deduction in his book on tax-related issues: The Benefit and the Burden. 

Bartlett tells us that there is a lot of money involved in the charity business.

"The deduction for charitable contributions is a large tax expenditure. Its size is a bit confusing because the Treasury Department lists it under three different categories: those for education, those for health care, and all others. The total revenue loss was $53 billion in 2012."

That means that we, the general tax payers, subsidized the activities of supposedly charitable individuals to the tune of $53 billion in one year. One should hope we are getting our money’s worth.

As with most tax expenditures the people who are most able to benefit are the ones in the high tax brackets.

"In 2009, 55 percent of the tax savings from the charitable contributions deduction went to those making more than $200,000; another 26 percent went to those making between $100,000 and $200,000. Less than 5 percent went to those making less than $50,000."

Many of the lower income people who make charitable contributions are ineligible for the saving because they are not in a position to itemize deductions on their tax return.

And what do people consider charitable contributions?

"According to surveys, 66 percent of contributions by those with incomes below $100,000 goes to religious institutions; only 7 percent goes to institutions focusing on health education or the arts. By contrast, among those with incomes over $1 million, 66 percent of contributions goes to health, education, or the arts; only 17 percent goes to religious organizations."

Religions, education, health, and the arts are the beneficiaries of charitable giving. What does this have to do with our definition of charity? How much of this ends up in the hands of the needy? In the view of the Internal Revenue Service, that is not even an appropriate question to ask. To them charity is any contribution to an organization that has attained tax-exempt status.

Religions perform charitable acts, but most of the tax-deductable contributions are more a form of dues; contributions are intended to cover the general operating costs of the religious institution. Fine, but why should the general taxpayer subsidize the operation of religious institutions?

If a wealthy person wants to contribute $10 million to create an endowed chair in some field at a university and thus have his name immortalized, what does that have to do with charity? And why do we have to reimburse him $3 million for his self indulgence.

Bartlett discussed the most irritating of the charitable abuses—one few appreciate—think tanks. Think tanks are those mostly conservative organizations that spend their time promoting their biases. Institutions with an original intent that was loftier, have become mouthpieces for those who can afford to promote their political philosophies.

"...deductible contributions to think tanks and related organizations are substitutes for nondeductible political contributions."

This is how it works:

"For example, in 2010 the conservative Heritage Foundation, which is tax exempt under section 501(c)(3) of the tax code, set up a parallel organization called Heritage Action for America which is not tax exempt and is organized under section 501(c)(4) of the tax code. This reorganization permits Heritage to be more active politically on the issues of concern to its contributors without jeopardizing its tax exempt status."

This dodge allows outfits like Heritage:

"....to be openly partisan, endorsing candidates, running advertisements, making campaign contributions, and so on."

Perhaps even more perverse is another version of this tax dodge.

"Conversely, many political groups and trade associations have 501(c)(3) affiliates for those that need tax-exempt status to receive funds from a foundation, an estate, or someone in need of a tax deduction."

And what does this political chicanery have to do with charity?

What a mess! It would be better to eliminate the charitable deduction entirely than to condone these abuses. People would still support their churches and the churches would still pursue their charitable activities. People have always found ways to contribute to the truly needy. As Bartlett points out:

"Many countries do not allow such a deduction and don’t appear to suffer as a result. These include Austria, Finland, Ireland, Italy, Sweden, and Switzerland."

Ideally, one could redefine "charity" to be actual charity, but, of course, nothing will change. The needy have no political voice; the non-charitable special interests can speak loud and clear.