Unintended outcomes often reveal underlying principles. This is certainly true in the responses to Congress’s temporary increase in the proportion of income that can be excluded from taxation through charitable gifts.
Intended as an incentive to help the hurricane-battered Gulf Coast, the measure reportedly has become a bonanza for colleges and churches. This illustrates the case that while a lot of charitable giving might go to good causes, it does relatively little to relieve poverty.
After Hurricane Katrina, Congress passed a temporary measure that increased from 50 percent to 100 percent the proportion of income one can exclude from taxation through charitable giving. The intent was to motivate increased giving to those harmed by three destructive storms.
Our society recognizes the benefits charitable institutions provide, and we long have granted special tax treatment for charitable giving. Those who donate to charities can exclude such donations from income subject to the federal income tax. If you have $50,000 of income that would otherwise be taxable but you give $5,000 to charity, you will only be taxed on $45,000.
But such favorable treatment is limited to gifts up to 50 percent of your income. Anyone may donate more than that, but only the amounts up to 50 percent can be excluded from taxation. Congress raised this limit to 100 percent for the last months of 2005.
Most states with income taxes imitate federal treatment of charitable giving. The combined federal and state tax exclusions provide strong incentives. A high-income person can give $1,000 to charity at an after-tax cost of $600 or less. The charity gets $1,000, the taxpayer is out a net $600, and state and federal governments forgo $400.
Raising the limit motivated greater giving. While hard numbers are not yet available, early reports indicate that the resulting increases in giving to colleges and churches will be several times the increases for storm relief.
While charitable giving benefits society, we should not delude ourselves that it necessarily helps the needy. Most charitable giving goes to churches, colleges and universities. This is especially true of large gifts from high-income households.
However beneficial churches are to society, the bulk of giving to churches benefits members of the recipient congregations. And whatever good colleges create, most of the benefits they generate are captured by those who study there.
The upshot is that most of the implicit government subsidy embodied in our tax code goes to institutions that primarily benefit households with above-average incomes.
Studies show that government effectively funds about a third of giving to churches in high-income suburbs. For inner city churches whose members are primarily members of minority groups, the figure is near zero.
The point is not that tax policies that subsidize charitable giving should be abolished. It’s just that we should be honest with ourselves about their effects.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.