Monday, December 24, 2012

Will Charities Survive if Congress Eliminates the Charitable Tax Deduction?

The Christmas Season is upon us and this is a traditional season of giving.

It is not just the gifts for family and friends, but also the giving of goods and money to charitable causes. 

Giving and sharing with those less fortunate makes the giver feel good.  Giving is also a part of most cultures and is reinforced by the dictates of most religions which require believers to give as a part of their religious duty.

In the United States people who give money or goods to charities have an additional, financial, incentive to give and that comes in the form of lower income taxes.  Both the Federal government and most states with an income tax allow people to deduct the value of charitable contributions from their gross income for tax purposes.

Now with concerns about the fiscal cliff and the Federal government's need for more revenue to pay for its out of control spending the search is on for ways to increase revenue.

While logically the solution should be to bring spending into alignment with revenues, politicians and bureaucrats tend to take spending as a given and look to tax increases to make up the difference.

Currently, two approaches are being explored for increasing tax revenues.  One approach is to simply raise tax rates despite the fact that, historically, that tends to result in less revenue.  A second approach calls for keeping current rates but restricting or eliminating deductions.

Deductions allow people to subtract certain types of expenses from their gross income thereby reducing their income for tax purposes.  Eliminating or restricting deductions would certainly result in more revenue for the government as people's ability to reduce their taxable income would be curtailed.

Of course, organizations and businesses, whose activities or products are affected by people's ability to reduce their tax bills by contributing to or buying from these organizations, are opposed to this solution - at least as far as their activities are concerned.

However, while it is clear that deductions for home mortgage interest and local real estate taxes provide a powerful incentive for people to buy rather than rent their living quarters, there is some question as to whether allowing people to deduct charitable contributions is an incentive for people to give to charity.

Proponents of eliminating the deduction cite statistics showing that charitable giving in the U.S. has remained a relatively constant 2% of Gross Domestic Product despite numerous changes in tax laws affecting such giving. 

Charitable giving also has a long history going back to ancient times - long before there was an income tax and the need for income tax deductions.  Long before governments became involved in building social safety nets, churches were involved in soliciting money from members to help those less fortunate.  Hospitals, orphanages, poor houses, etc. all began as services provided and paid for by churches.

In the Western world the idea of people having a duty to look out for those less fortunate has long been ingrained in the culture.  Sharing one's good fortune with those less fortunate is the thing to do for many people.

As one who not only contributes to charity but also keeps records of contributions for tax purposes and benefits from the deduction, I can honestly say that I would miss the deduction but, after reviewing my contributions haven't found any that I would stop donating to in the absence of the deduction.  Friends I have spoken with have said the same thing about continuing their contributions in the absence of a tax deduction.

That being said, eliminating the tax deduction will reduce contributions to many non-profits.  Part of this will result from people taking a closer look at an organization, its mission and how efficient it is with their money. 

In the absence of  a tax deduction, those donating to charities will be apt to take a closer look and how the charity uses their money.  Those charities in which administrative and/or fundraising consumes most of each dollar received will find contributions being redirected to other charities where the bulk of each dollar goes to helping those in need.




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