Tax reforms could alter the charitablegiving dynamic in the U.S. The American experience suggests otherwise.
By Michael Ong
There has been a wide range of predictions as to the effect the tax bill currently winding its way through the legislative process will have on charitable giving. Some predict dramatic and dire impacts on charities, mainly as a result of the increase in the standard deduction which is designed to double under both the Senate and House versions of the bill.
A doubling of the standard deduction would eliminate the benefit of filing itemized deductions for many individuals and families. The charitable deduction is one of the primary reasons taxpayers choose to itemize deductions. Additionally, a doubling of the estate-tax exemption would mean estates of less than $11 million would fully escape transfer taxation. With a lower estate-tax exemption, some high-worth people elect to donate the charities or establish charitable foundations on the notion that “I would rather give to charity than to the U.S. Treasury.”
So that leads to the question, if people don’t benefit from a tax deduction for their charitable giving, will they still give to charity at the same level? The Tax Policy Center, a think tank sponsored through the Brookings Institute, has said it expects charitable giving will decrease by $16 billion to $24 billion under the House version of the bill. But the math and predictions are not so easy.
For example, last year on “Giving Tuesday” (that being the Tuesday after Thanksgiving) donations to charities totaled over $168 million, with many gifts in the $10 and $25 range. Those givers clearly were not motivated by a tax deduction, but rather the shared group activity of a day focused on charitable giving.
The reasons and motivations for charitable giving have been studied by academics and even by the Federal Reserve itself. The Federal Reserve Bank of St. Louis issued a study titled, “The Economics of Charitable Giving: What Gives?” While the paper addressed so called “prestige giving,” that being the big named-gift, the conclusion: “although some people may be altruistic when giving, economics tells us that the dominant motivation is the internal satisfaction that individuals derive from the act of giving itself.” This dry economic concept of “internal satisfaction” covers two concepts that are not identical, but also not mutually exclusive.
The coming changes in the tax code may impact the prestige giver, but the desire to achieve internal satisfaction for a donation will always be a powerful motivator.
The secular component to giving can be found in such concepts of Maslow’s hierarchy of needs, wherein once a person’s essential need for survival are satisfied, there is a next level of needs based more on self-actualization and the human striving for meaning in life. A more spiritual and religious-based motivation is centered on the express duty to care for the poor found in both Judeo-Christian traditions, as well as the Muslim principal of Sadaqah, and practices among Hinduism, Buddhism and many other faith traditions.
These motivations, it’s fair to assume, are clearly distinct from considerations driven by U.S. tax policy. The non-tax driven aspect of philanthropy is consistent with the character of Americans observed as far back as the French visitor Alexis de Tocqueville, who observed citizens spontaneously forming civic organizations to address local needs and engaging in philanthropic efforts. This spirit holds true today as Americans are some of the most generous donors to charity in the world.
The total of gifts to charities last year was $390 billion, which is roughly the GDP of Norway and more than the that of countries like Austria and the Philippines. Of course, hanging over every discussion of charitable giving in the month of December is the Ghost of Jacob Marley. The haunting of Ebenezer Scrooge on Christmas Eve is a classic example of the motivation to give as inspired (some say coerced) by the fear of eternal judgment.
The idea that the gift of alms may serve to remedy past neglect or bad acts is something no charity will outright reject. Rather, gifts of money are willingly accepted in this world, and this fiscal year, whatever the ultimate impact on the next. The charitable impulse to give appears so hard-wired into the American spirit that a change in tax law, whatever ultimately becomes law, is unlikely to affect most ordinary donors.
The coming changes may impact the prestige giver, but again, the desire to achieve the internal satisfaction for a donation, especially if the gift, comes with a naming opportunity, will always motivate some people. After all, many donations come from the motivation that “I’d rather give to a deserving charity than to my undeserving children.” Tax laws will change— but human nature is much more stubborn.
Michael Ong is president of the Ong Law Firm in Overland Park, Kan.
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