Two disturbing trends have converged in the nonprofit world in recent years. The first is the effect of income and wealth inequality on whose interests get heard by government, business, and philanthropic leaders. The second is the declining participation in civic institutions, along with the increasing number of people who say they feel isolated and alienated from community life.
We believe there is a simple way to start addressing both problems — a refundable tax credit for charitable donations.
Our reasoning is straightforward. The share of households donating to charity is at its lowest point in nearly 20 years. At the same time, those donating to charities are increasingly among the wealthiest Americans. This is attributable in part to federal tax policy that provides the greatest incentive to give — in the form of a deduction for charitable contributions — to those in the highest tax brackets.
Only people who itemize their deductions benefit from the charitable-contribution deduction. In 2019, the latest year for which such data is available, 5 percent of taxpayers with incomes of less than $50,000 itemized deductions, compared with 90 percent of those with incomes of more than $1 million. What’s more, each dollar of a deductible contribution provides a greater benefit to people in higher tax brackets because lowering income means lowering taxes paid on that dollar.
This system, which skews a tax subsidy to those nonprofits favored by the rich, is undemocratic.
The solution, as we lay out in a recent paper, is to adopt a refundable tax credit — what we call the Community Contribution Credit — that could be paid for by eliminating the charitable deduction. The credit would provide up to $500 for charitable contributions by households with incomes below the national median of about $70,000 in 2020. To receive the full $500 credit, taxpayers would need to donate at least $50.
A credit like this has the same value to taxpayers regardless of their tax bracket, thereby eliminating a subsidy for charitable giving that favors the rich. And by subsidizing the giving of low- and middle-income taxpayers who do not itemize, the credit would help ensure that the nonprofit world reflects the priorities of a broad swath of citizens.
Sparking Civic Participation
We are not the first to advocate for a charitable-giving credit rather than a deduction. But we offer several arguments for why it would lead to increased involvement in civic activities, which is especially imperative at the current moment.
Studies suggest that tax incentives for charitable giving yield not only increased financial donations, but also increased volunteerism. It’s easy to see why. Nonprofits use donor lists to identify potential volunteers. Providing financial support to an organization often leads to greater affinity for its mission and connection with other supporters and staff — all of which make volunteering more attractive. There’s even the possibility that the extra money provided to donors after taxes will lead them to spend more time volunteering rather than working additional hours to pay the bills.
In January, we conducted a national survey of roughly 1,000 people on the relationship between giving, volunteering, and participation in civic activities. Fully 54 percent said that giving to a particular charity was a primary reason they started to volunteer for that organization. And just 11 percent said they viewed donating as a substitute for volunteering.
Volunteering has enormous personal and societal benefits. Through volunteer work, low- and middle-income individuals are especially likely to acquire new skills and connections that lead to professional opportunities. Of those we surveyed, 64 percent said they learned valuable skills or acquired social networks from volunteering.
In a time of growing polarization and residential segregation, volunteerism can also bring together people of different races and socioeconomic status whose paths may otherwise rarely cross. Half of those we surveyed said volunteering resulted in meeting people with different political and social views or of different races or ethnicities.
Building Community
A tax nudge toward greater giving and volunteerism could also help people overcome a common tendency to focus on the benefits they expect to derive from a higher income and more consumption, while undervaluing the importance of building community ties and developing friendships — what economists call “relational goods.”
In our survey, 56 percent said that they found a sense of community through volunteering. This is consistent with evidence we analyzed from the U.S. Census showing that volunteerism is correlated with stronger personal connections and greater community involvement, including spending time with friends and neighbors, doing favors for others, participating in neighborhood projects, and interacting with people from other cultures.
The census data also shows that people who donate their time or money to a cause are more likely to become politically engaged, including voting in local elections, attending public meetings, contacting public officials, and discussing political issues with friends and neighbors.
This is not surprising. When people give to causes, they naturally become more aware of the issues and more interested in advocating for the causes they care about. In fact, 34 percent of those we polled said the experience of volunteering led them to become more politically engaged or start advocating for causes in their community.
Creating New Donors
An important benefit of our proposal is that it would alter the relationship between low-income households and the charities that traditionally serve them. Charities would have an incentive to educate their clients about the new tax credit, which would create a new donor class out of those who are typically served by nonprofits.
In our survey, 21 percent of those with incomes of less than $50,000 said that they would donate more because of a new tax credit. This increased involvement among lower income families would steer the philanthropic and nonprofit world to place more weight on their needs and interests.
A tax credit is certainly not a panacea for creating greater economic opportunity, improving civic engagement, or combating the politics of division. But it may be able to reorient the nonprofit world toward the interests of low- and middle-income households, help invigorate community involvement and relationship building, and draw more people into political and civic life. That would certainly be a start.
