On April 6, 1917, President Woodrow Wilson and Congress declared war on Germany. Surprisingly, one of the first considerations of that act was the impact on colleges, universities, medical schools and cultural institutions.
At the same time we declared war, we created the War Chest and the first charitable tax deduction that allowed individuals to make gifts to help with the war effort and shore up the few institutions whose support would be affected by the war.
That decision did not affect many people at the time because fewer than 10 percent of Americans paid taxes, and the top rate was 7 percent. As well, compared to today, there were relatively few nonprofit organizations. The cost to the government was relatively small and as a way to keep the war from putting an end to those institutions, the charitable tax deduction was effective.
Today, there is considerable controversy over what to do about the charitable tax deduction because it no longer affects only 10 percent of Americans paying taxes, and the impact of reducing the advantages of tax incentives is significant – especially for the top 3 percent of earners.
President Obama’s proposed budget is asking for the top deduction to be reduced from 35 percent to 28 percent. There are other bills being put forward that would limit the number of people who can make itemized returns. Some make the argument that the proposed changes would create as much as a $9 billion shortfall in giving to nonprofits as so large a percentage of the population are influenced in their giving by the deductibility.
Others argue the opposite because reducing the advantages of the top tax for giving has never been proven to reduce the total amount of personal giving. Charitable giving has remained roughly at close to 2 percent of personal income year after year regardless of the changes in the tax rates for itemizing charitable giving. As well, the cost of the deduction to government revenue is in the billions of dollars. Both sides have well-documented studies and projections to prove their arguments.
All that is a prelude to what I want to say.
While I understand the value of sophisticated instruments for legitimately reducing taxes, I am meeting more and more people whose first question about a gift (no matter the size) is whether or not it is tax deductible. This troubles me.
There is a growing industry of extremely sophisticated professionals who have taken charity, compassion, caring, duty and – yes – obligation to a community and encouraged people to think primarily about tax reduction as the motivation for giving. The satisfaction is not so much in the gift as it is in beating the system. Gaming the government has become an even larger part of the incentive for charitable giving.
The phrase “every gift is tax deductible” is on each nonprofit piece that goes out to potential donors and is also featured prominently on nonprofit websites. Even churches emphasize that supporting the local congregation has tax benefits.
While I don’t want to camp on the point, I do want to say I am concerned that the desire to give and be generous is being overshadowed by the desire to see the tangible benefit of reducing taxes with this gift. It is one of the reasons many people delay their major giving until the end of the year when they can estimate what gifts they will “need” to make to reduce their tax liability.
The servant is becoming the master. The means is becoming the ends.
Last year I set aside a certain amount of my giving and did it with no deductions. I gave to individuals or organizations with no tax certificates. I gave without getting receipts. I just gave. It was not all or even a large part of our giving for the year, but it was a portion. I wanted to see what the effect was on me and whether or not to keep doing it.
It didn’t change my life. It didn’t make me stop taking deductions. It did one thing though. It allowed me to see opportunities for giving I would have discounted before because they were not deductible. It allowed me to make some gifts that improved the lives of individuals and families. It actually felt more like giving than tax planning…and that was worth it.
I’m not arguing for going back to 1916. Times have changed. Planning for large gifts is necessary. Nonprofits have proliferated and, according to some, employ almost 10 percent of the entire population. The arts and cultural institutions especially would suffer from reduced giving by those few motivated only by tax considerations. All this is true.
However, may I encourage you to set aside a certain amount this year and give it with no consideration of tax deductibility or benefit? Do it and see if you have the same experience – or maybe even better. I’d love to hear from you.