(Originally published in the December issue of Bruce R. Hopkins Nonprofit Counsel, available electronically to subscribers on publication.)
The Senate Committee on Finance, on October 18, held a hearing on the federal income tax charitable deduction, titled “Tax Reform Options: Incentives for Charitable Giving.” The fundamental question before the Committee is whether to leave this deduction alone or, in the furtherance of “tax reform” and/or deficit reduction, trim the deduction in some fashion or otherwise change the charitable giving law.
Joint Committee Summary
In preparation for this hearing, the staff of the Joint Committee on Taxation (JCT) prepared a law summary for the Finance Committee: “Present Law and Background Relating to the Federal Tax Treatment of Charitable Contributions” (JCX-55-11, October 14). In addition to a summary of the charitable deduction law, this analysis contains an inventory of the “economic rationales” for this deduction.
This economic analysis begins with the observation that, where donors make charitable contributions for “purely altruistic reasons,” the income or property given to a charity “enriches the recipient charity but does not enrich the donor.” “Under a comprehensive income tax system,” the JCT staff paper states, the contribution “does not represent consumption but a decrease in wealth and therefore should not be taxed.”
Conversely, the JCT staff notes that “people may find charitable giving gratifying because they enjoy making someone else happy, they feel relief from the guilt of not giving, or they enjoy the recognition that accompanies donations.” This experience is described as producing (we are not making this up) a “warm glow.” This is said to provide a “benefit” to donors, causing the contribution to be, “at least in part, a personal expenditure and a deduction for the full amount of the donation should not be allowed.”
The JCT analysis then observes that charitable organizations “often provide goods and services to select classes of charitable beneficiaries rather than to the public at large.” Examples of this phenomenon are said to be gifts to a college that “benefit select students and faculty” and gifts to a hospital that benefit “certain patients and doctors.” The paper thus concludes: “If the larger public is unable to share in the benefit of the charity’s activities, such donations are private contributions to private goods [sic] and there is no economic rationale for a charitable contribution deduction.”
This analysis notes that “sometimes charitable organizations provide goods or services that the government would otherwise provide.” Here, the economic rationale for providing a charitable deduction is said to be that the deduction is an “equivalent” to deductions permitted for the payment of state and local taxes.
Another economic rationale for the charitable deduction advanced in the JCT analysis is that “many charitable organizations provide goods and services with significant spillover benefits to the public at large.” These benefits are characterized as “positive externalities.” Thus, “it is argued that the tax deduction for charitable contributions under present law encourages donations to charities that provide goods with significant spillover benefits and, therefore, promotes the provision of such benefits.”
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