Give Everyone the Same Tax Incentive to Donate ­— Not Just the Rich (Opinion)

Tim Foley for The Chronicle

The consumer orgies of Black Friday, Small Business Saturday, and Cyber Monday have a rapidly growing nonprofit rival: Giving Tuesday, which celebrates its seventh year today. Begun by a coalition hoping to reinvigorate giving in the United States during the holiday season, Giving Tuesday has turned into a philanthropic juggernaut: Last year, the day moved at least $300 million to nonprofits by mobilizing hundreds of thousands of people, many of them infrequent donors, to give to charities of their choosing.

Giving Tuesday champions the welcome spirit of ordinary donors and the amazing diversity of American charity. But when it comes to philanthropic giving in the United States, it proves the exception to a stubborn rule. Aggregate American giving has remained at around 2 percent of gross domestic product for more than 40 years. Consistent efforts on the part of nonprofits to boost that figure prove unsuccessful time and time again, no matter how well intentioned or strategized.

If we want to change the patterns of philanthropy in the United States and abroad, we need to think bigger. We need to appeal not just to the instincts of donors but also to the norms and policies that shape philanthropy.

Charitable giving doesn’t happen in a vacuum; it is embedded in a wider set of incentives and legal rules — especially tax incentives — that systematically value some donors over others. Current laws bake into American charity a deep and troubling plutocratic bias, favoring the preferences of wealthy donors over those of lesser means. To expand our philanthropic horizons, and to make philanthropy more democratic, we’ll have to change that system into one in which donors of all kinds can stand on equal footing.

Upside-Down Incentives

Of the approximately $410 billion donated by Americans to charity last year, giving by living individuals accounted for $287 billion, or 70 percent of the total. It might seem as if philanthropy is just the exercise of a person’s liberty to donate money, an act that has little or nothing to do with government spending and policy priorities. In actuality, American philanthropy — and that of most other countries — is supported by taxpayers through tax concessions, and this fact implicates all citizens in a system with badly distorted priorities.

The charitable tax deduction was introduced into the tax code through the War Revenue Act of 1917. The details of the provision have been amended over the decades, but the core of the deduction remains the same: a subsidy in proportion to the tax rate of the donor. If Rick earns the median personal income of $31,000, for example, and Annie is a homeowner who nets $300,000 a year, then (at 2017 tax rates) Rick will be subsidized at a 15 percent rate, whereas Annie’s subsidy will amount to 39 percent of her charitable contribution.

This differential in subsidies for philanthropic giving makes it more expensive for poorer people to give. Let’s imagine that both Annie and Rick give $1,000 to a local food bank. Because Jeff is taxed at a 15 percent rate, his donation will cost him $850 in post-tax earnings and the U.S. Treasury $150 in forgone revenue. By contrast, Annie’s donation will cost her $610 in post-tax earnings and the government $390 in forgone revenue. So, although both $1,000 contributions are equally valuable to the food bank, the actual cost of Annie’s donation is higher. The cost of acting virtuously, one might say, is less expensive for rich people.

There is no good reason to require taxpayers to provide extra support for charitable donations made by the rich. Clearly something has gone wrong when taxpayer money supports Bill Gates’s check-writing more heavily than your neighbor’s Boys & Girls Club membership.

Sparking Middle-Income Giving

A second problem with the plutocratic bias of the tax code, though, is that it may very well leave significant philanthropic dollars on the table that could otherwise go to the nation’s charities.

Given the decreasing importance of additional income to people at the top of the income pyramid, and the increasing importance of income to those at the bottom, it would seem that subsidies would be most effectively targeted at comparatively poorer donors instead of wealthy ones. Wealthy people can more easily afford to donate than poor people, and yet our tax system places a greater burden per dollar spent on the least well-off donors.

Richer philanthropists are most likely to be able to afford a higher price on charitable giving.

Increasing philanthropic potential in the United States will depend on correcting the “upside-down effect” of the tax code’s charitable deductions by giving a more equal voice to middle- and working-class donors in the philanthropic arena. More than 70 percent of tax filers are ineligible for the charitable deduction because they do not itemize their deductions at all, and under the new tax law that share could jump to 90 percent. Correcting the tax code’s imbalance would not only correct a serious injustice but it could also empower millions of Americans to donate more while doing little or nothing to donors with enormous capacity to give already.

Donation Credits for Everyone

What can be done that could simultaneously eliminate the plutocratic bias in the charitable contributions deduction and raise the rate of giving across the spectrum of American charity? Here’s a simple proposal: Replace the tax deduction with a tax credit capped at the same amount for everyone, regardless of income level or itemization status.

How would a credit work? One approach would be to subsidize all philanthropic contributions equally, up to some dollar limit. For example, the government might offer to credit 25 percent of any donation up to a $1,000 cap on the credit. In this model, both Annie and Rick from earlier would be credited $250 for their respective $1,000 donations to the local food bank.

In other words, a tax credit would level the charitable playing field in favor of low-income givers, many of whom contribute a higher share of their income than rich donors but are subsidized less under the current regime. If policy makers wanted to increase charitable giving even more explicitly, they could design a “civil-society tax credit” or “stakeholding grant” tied to the percentage of earnings a taxpayer gives away in a year. For example, the government might offer anyone who donates 3 percent of his or her annual income an additional $1,000 to donate to any federally registered nonprofit. This latter tax credit could stimulate extra giving on the part of donors looking to take advantage of an additional charitable credit.

Moving from a deduction to a credit that recognizes giving on equal terms would also diversify the types of causes that find philanthropic support. Wealthy donors tend to support different charities than middle-class donors do. Donors making $100,000 or more, for example, gave only 1 percent of their philanthropy to the support of social-service organizations (like the Salvation Army or Goodwill) in 2005, while donors making less than $100,000 gave 10 percent of their contributions to social-service groups.

Even if wealthy philanthropists are donating to worthy causes, the tax code should not disproportionately benefit their preferences. A philanthropic system underwritten by taxpayers should provide every citizen with opportunities to engage in civil society through nonprofit groups and associations. By amplifying the voices of a larger set of donors, the charitable tax credit could diversify where money goes, allowing for a wider array of charitable groups to thrive, not just those favored by a small subset of philanthropists.

Can a change in public policy nudge the rate of annual charitable giving above the stubborn rate of roughly 2 percent of GDP? Well-crafted policies hold out the hope of doing just that while extending a tax benefit to all citizens, not just those wealthy enough to take advantage of the law’s plutocratic biases.

Rob Reich is author of “Just Giving: Why Philanthropy Is Failing Democracy and How It Can Do Better.” He is professor of political science and faculty co-director of Stanford University’s Center on Philanthropy and Civil Society.