28 July 2020

The Problematic Characterization of the Charitable Deduction as a Subsidy

by Sara Barba and Brian Walsh

The charitable deduction – which has the effect of removing taxes from gifts to charity – is an acknowledgement by Congress that money donated to organizations for a tax-exempt purpose should not be considered income and taxed. Too often today, however, some policymakers and their staff – not to mention critics of the charitable deduction and skeptics of charity in general – are mischaracterizing the charitable deduction as though it were a government subsidy. This mischaracterization is problematic and stands reality on its head.

First, rather than acknowledging the essential role that the generosity of private donors plays in funding charitable activities, attempts to rebrand the charitable deduction as a government subsidy inaccurately convey that the untaxed portion of charitable donations are a contribution from the government. Even with the benefit of the charitable deduction, however, every dollar that a donor gives to charity comes out of that person’s pocket and leaves her worse-off financially.

But proponents of the government-subsidy view of the charitable deduction apparently think government is entitled to as much of our income as it chooses to tax. Whatever portion of our income government “allows us” to keep is, in this view, an act of government forbearance or largesse.

It helps here to consider that the Constitution and Bill of Rights have never needed any provision or amendment to make it clear that Americans have a right to their own income. This is one of those rights and truths that the Declaration of Independence calls “self-evident.” To function properly, any government does indeed need some power to impose reasonable taxes. But to jump from that truth to the conclusion that government “subsidizes” whatever it does not tax is a leap supported neither by common sense nor by our constitutional history.

Second, the charitable deduction helps safeguard our freedom to form and operate private organizations and associations to promote the public good. The deduction facilitates the autonomy of this realm of private action to feed, clothe, shelter, educate, and otherwise help our neighbor. It says that these good works should not be weighed down or hindered by taxation.

Our freedom of association has been well-established for over two centuries and has helped ensure the success of our nation’s 1.5 million private, tax-exempt organizations. Predominately by means of private donations, these charitable associations, including religious associations, have accomplished their missions in a sphere of private action that does not belong to any government.

Over 200 years ago, the U.S. Supreme Court affirmed Americans’ freedom to associate and form charitable organizations when the Court rejected the state of New Hampshire’s attempt to take over Dartmouth College. Dartmouth had been founded as a private university and endowed by private philanthropic contributions. In rejecting the takeover, the Court held that the Constitution restricts the power of the state to interfere with private charitable endeavors. As tax attorney Alex Reid has written, due in part to this decision Americans remain “free to create, free to operate, and free to terminate our associations as we please.”

Typically accompanying these mischaracterizations of the charitable deduction are questions about whether the charitable deduction is effective in encouraging more charitable giving. Will Americans really give less to charity if they have to pay taxes on their gifts? The short answer? Of course they will. That is why almost all tax deductions exist – to encourage good behavior we want to see more of and to recognize when dollars should not be considered income and therefore not taxed.

There are, of course, many examples of Americans giving to charity regardless of  tax incentives, which we should welcome and encourage. However, that doesn’t mean we don’t want to see even more resources donated to charity. And that doesn’t mean the deduction isn’t necessary. A simple calculation shows that – a least for the mere 11 percent of taxpayers who can still claim the federal charitable deduction – donors give at least $2.50 to charity for every dollar of taxes the government does not collect on that donation.

Fortunately, lawmakers on both sides of the aisle and Capitol have recognized these truths and the indispensable safety net the charitable sector provides. They have introduced legislation that would expand the CARES Act’s temporary universal charitable deduction. You can read more about that here.

Among other societal benefits, the charitable deduction:

  • Recognizes that money you voluntarily give away to a tax-exempt cause is not income or consumption.
  • Encourages Americans to give more money to charitable causes by reducing the cost of giving.
  • Serves as a guardrail between ever-encroaching government power and civil society’s private sector.

Clear thinking coupled with our nation’s constitutional history tell us the charitable deduction is not – and is not intended to be – a subsidy from the government.

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Sara Barba is a vice president at Urban Swirski & Associates and director of policy for the Alliance for Charitable Reform. 

Brian W. Walsh is a D.C.-based attorney and serves as executive director of the Faith & Giving Coalition, a multi-faith, nonpartisan association of national faith communities and faith-based service providers whose mission is to promote charitable works and charitable giving on behalf of Americans of all faiths.