Pauper’s Parity: Taking Away the Fine Print of “Your Contribution Is Tax Deductible”
Written By: James Patrick Huston
The commercial begins with, “When you are out searching for that perfect gift, don’t forget to check out Goodwill. You can find treasures there for dollars less than anywhere else. Plus, if you donate, you can write it off on your taxes!”1 We have all heard it before. “If you donate to our organization, you can deduct it on your tax return.” While this statement may be true, it is misleading. Many Americans quickly learn when completing their tax returns that they are unable to take the deduction because they are not itemizing taxpayers.2
Since 1917, the United States Tax Code has encouraged charitable giving through the Charitable Contribution Deduction, allowing individuals, estates, and corporations to deduct certain contributions made to qualifying organizations.3 Although the Deduction originated due to the fear that the increased taxes from World War One would result in a decrease in charitable giving, it has remained a widely-used deduction for millions of taxpayers.4 The Deduction has undergone many changes since its inception, including allowing an unlimited deduction and allowing non-itemizing taxpayers to claim the Deduction.5 However, the one thing that has remained is the purpose and theory of the Deduction: to encourage charitable giving and to ensure the Government does not have to subsidize private charity.6
The United States Tax Code encourages taxpayers to engage in certain behaviors amounting to social engineering. Other than charitable giving, the Government encourages home ownership, attending college, and having children through the use of tax incentives in the form of deductions and credits.7 Although these incentives provide a real benefit to taxpayers by lessening their tax burden, the Code does not provide these benefits universally. These incentives have a tendency to be biased against lower-income Americans, especially in the arena of charitable giving.8
Under the current American federal tax system, there are two types of deductions: itemized and standard.9 Unless a taxpayer has more qualifying itemized deductions than standard deductions, she will not be able to claim certain benefits, such as the Charitable Contribution Deduction.10 On the surface, preventing non-itemizing taxpayers from claiming itemized deductions such as those from charitable contributions may appear equitable, because the standard deduction is designed to encompass the available itemized deductions.11 However, studies have shown that non-itemizing taxpayers are actually more charitable than their itemizing counterparts.12
These studies generally indicate that the least wealthy Americans give a larger percentage of their income to charity than higher-income Americans.13 This disparity in giving is also evident in where the donations go, as lower-income Americans typically donate to religious and social service organizations compared to the cultural organizations, medical facilities, and hospitals wealthier Americans contribute to.14 Further, wealthier Americans are able to benefit from their charitable giving in ways lower-income Americans cannot. For example, wealthier Americans are able to utilize private foundations, appreciated land and stock, and even contributions for tickets to watch their favorite football team, while taking a tax deduction.15
If these inequities are allowed under the current federal tax system, how can it be fixed? There have been several proposals to reform the Charitable Contribution Deduction, including replacing Section 170 with a flat credit,16 re-extending the benefit to non-itemizing taxpayers,17 imposing a floor and ceiling,18 and creating a matching grant system.19 However, these proposals do not take into account the different income levels and types of giving that are present between lower- and higher-income Americans.20 Further, these proposals do not consider that there are areas in our tax system that allow a credit and a deduction to achieve the same goal.21
The solution proposed by this Note does not replace Section 170, but modifies the Section by creating a Charitable Contribution Credit for lower-income Americans. The non-refundable Credit would not only encourage lower-income Americans to give more to charity, but it will also allow them to benefit from their charitable giving. Although the Credit would not eliminate the benefits enjoyed by wealthier Americans, it would allow America’s most charitable a benefit for their giving.
To fully describe the problem and proposal, this Note is divided into four parts. Section II will provide a background of the Charitable Contribution Deduction, including the history and purpose of the Deduction and a description of how the Deduction has evolved since its inception in 1917. Because this is a tax policy Note, it only addresses the major changes.
Section III will discuss tax policy in America with an emphasis on charitable giving. It will first discuss the legislation that has affected (or not) the Deduction, and then conclude with a discussion on how receptive taxpayers are to changes in tax policy.
Section IV will provide an analysis of charitable giving in the United States. It will address the disparity of giving in the United States through a discussion of the donative behaviors of both lower- and higher-income Americans. It will also discuss the “big-hitters” in philanthropy, including where these individuals contribute their money. Section IV will also provide data from the Internal Revenue Service, as well as other reliable philanthropic organizations. It will conclude with a discussion on how the Charitable Contribution Deduction in its current form primarily benefits the wealthy. It will also provide the basis for the proposal discussed in Section V.
Section V will outline a proposal for creating a Charitable Contribution Credit available to lower-income Americans. It will discuss how our Tax Code encourages certain behaviors through tax incentives. Further, it will outline the framework of the proposal, the responses to possible objections to the proposal, and arguments for why a Charitable Contribution Credit is needed. Finally, this Note will provide some concluding comments on the Deduction in its current form and the proposal.Purchase to Keep Reading
1. Goodwill Industries of Middle Tennessee, Your Donation is Tax Deductible!, Y
OUT UBE (Dec. 15, 2011), https://www.youtube.com/watch?v=wfXaVRctPWw.
2. Topic 501: Should I Itemize?, I
NTERNAL R EVENUE S ERV. (Sept. 21, 2017), https://www.irs.gov/ taxtopics/tc501.html. Itemized deductions are personal deductions the Government allows a taxpayer to deduct from his or her taxes. These “itemized” deductions can include home mortgage interest, medical and dental expenses, and charitable contributions. Taxpayers must choose between the standard deduction or itemizing their deductions. Id.
3. See generally I.R.C. § 170.
4. See infra pp. 119-20 and notes 29–30.
5. See infra notes 35 and 43.
6. See infra notes 44–45.
7. See infra pp. 128-29 and notes 119–23.
8. See infra pp. 129–130 and notes 135–36.
9. See infra p. 129 and note 125.
10. See infra p. 129 note 129.
11. See infra p. 129 note 130.
12. See infra Section IV.A.
14. See infra Section IV.B.
15. See infra pp. 126-27.
16. See John Davies, The Charitable Contributions Credit: A Proposal to Replace Section 501(c)(3) Tax-Exempt Organizations, 58 C
ORNELL L. R EV. 304, 313 (1973); see also I. Richard Gershon, A Proposed Charitable Contributions Credit: It Is Best to Give and To Receive, 11 O HIO N.U.L. R EV. 75, 83 (1984).
17. See Ellen P. Aprill, Churches, Politics, and the Charitable Contribution Deduction, 71 B
OS. C.L. R EV. 843, 850–51 (2001).
18. See S
TAFF OF J OINT C OMM. ON T AXATION, 113 TH C ONG., P RESENT L AW AND B ACKGROUND R ELATING TO THE F EDERAL T AX T REATMENT OF C HARITABLE C ONTRIBUTIONS 50–51 (2013).
19. Id. at 54.
20. For purposes of this Note, lower-income Americans are those earning less than the amounts represented in Table 1, infra, whereas higher-income Americans are those earning in excess of the amounts represented in Table 1, infra.
21. See generally Tax Benefits for Education: Information Center, I
NTERNAL R EVENUE S ERV., https://www.irs.gov/uac/tax-benefits-for-education-information-center. An example where a credit and a deduction would achieve the same goal would be the American Opportunity Credit and the Tuition and Fees Deduction, both which encourage attending post-secondary education. Id.