29 November 2017

Charitable Giving is Not a “Tax Dodge”

by Sean Parnell, Vice President of Public Policy, The Philanthropy Roundtable

The time of year stretching from late November through New Year’s Eve is often known as the “Giving Season,” as many Americans not only celebrate the holidays but also find a little extra to give to charities and those in need. And while it is almost surely several places out of first on any donor’s list of reasons to give, it’s clear that the tax deduction for charitable gifts has some impact on the timing and size of many people’s giving – it’s not a coincidence that the Giving Season is at the end of the year, or that last few days in December account for an outsized share of donations. In one study, more than ten percent of annual giving came in the last three days of the year!

So it should be concerning for Americans who prefer to see private charity addressing needs instead of government to read articles like the recent op-ed in The Wall Street Journal by Stephen Moore bemoaning philanthropist George Soros’ recent donation of $18 billion to his foundation and urging Congress to consider scrapping the charitable deduction entirely, or at least severely curtail it. Moore is a prominent supply-side economist who has been a long-time fixture at a number of conservative and libertarian organizations, and was an economic advisor to the Trump campaign.

There are a number of problems with Moore’s piece. To begin with, his assertion that George Soros’ generosity in transferring billions of dollars into his foundation constitutes a “tax dodge” is deeply misguided and incorrect. Tens of millions of Americans routinely deduct charitable contributions each year, both large and small – describing Soros’ giving as a “tax dodge” is an insult to everyone who deducts a few hundred dollars given to a church or homeless shelter, or any other worthy cause. The fact that Soros is able to deduct considerably more than most isn’t a “dodge,” it’s the mark of a successful career and extraordinary generosity.

Moore also states that “True tax reform is predicated on the principle that all income should be taxed… only once,” and goes on to complain that because Soros gave much of his money to a private foundation, government won’t get its “cut.” Setting aside the oddity of a limited-government conservative demanding government get its “cut,” Moore has in the past called for eliminating taxes on capital gains (a form of income) and defended the tax-free status of savings accounts for health, college, and retirement. Given this, the principle he’s advancing seems more than a little selective.

And Moore as an economist is surely familiar with the widely used Haig-Simons definition of income, which is essentially that income equals consumption plus net changes in wealth. While this definition is hardly unassailable, it is the starting point for any discussion of what constitutes income, and clearly money given away is not part of either consumption or wealth gain.

More important than what is and is not part of some economic definition of income is what is defined as taxable income. Scholarships and financial aid for low-income students, large medical bills for cancer patients paid by an insurance company, a financial award from a personal injury lawsuit – all of these fit most any definition of income, but for good reason are excluded from taxation, and likewise charitable giving needs to be excluded from taxation.

Curiously, Moore accepts that a tax deduction for giving in support of “genuine philanthropic activities” is defensible, citing the giving of Bill and Melinda Gates as well as the libertarian-friendly brothers Charles and David Koch as examples. Soros, it seems, is singled out less for the size of his giving (and tax deduction), than the causes supported by some of his generosity: “…massive de facto lobbying operations for bigger government and liberal causes like higher minimum wages, gun control, universal health care, and a carbon tax.”

This is a very dangerous path for anyone who wants to see charitable giving remain largely free of political influence and control. For a hundred years, the charitable tax deduction has not only promoted charitable giving and recognized that money given away isn’t actually part of an individual’s income, but also established a guardrail between the government and civil society, ensuring independence for the latter from the former.

Moore’s attack on the ability of successful Americans to establish foundations that support causes large and small, and yes controversial and non-controversial as well, threatens to diminish a major contributor to civil society that often times does what government cannot or should not do, or at least cannot do well.

Moore is (rightly, in my opinion) keenly focused on the need for our country to return to the vibrant economic growth that characterized the past, and sees the charitable tax deduction as an obstacle to even lower tax rates. Unfortunately, he seems to have neglected the fact that our nation is more than a government and an economy.

While the specific giving of any philanthropist may raise the hackles of some, it should not cause us to question a key policy that has helped to make America the most generous nation in the world and also one less dependent on government due in large part to a vibrant civil society. Surely that is worth preserving alongside restored economic growth.