Charity Should Stop Here

By Martin Hutchinson

(Editor’s Note: Tax deductions are one of the ways that government either rewards or punishes people for their behavior. In a state that secedes and becomes a new nation, we hope that the idiocy that is Washington’s criminal tax code would not exist. Charitable deductions are a part of that tax code and should not exist. DumpDC does not care a whit if charitable deductions “cost” the Treasury any money. Our only concern is individual liberty and property rights.)

At this season of goodwill, my thoughts immediately turn to that unsung hero Ebenezer Scrooge, and this year, in view of the subject’s topicality, to his possible thoughts on today’s major economic policy problem in the United States of tax reform and budget deficit reduction.

One thing immediately springs to mind: he would wish to eliminate the income tax deduction for charitable contributions. Old Ebenezer would in this case be magnificently right.

The tax deduction for charitable contributions was an early feature of the US income tax code, introduced in 1917 because of a concern that the wealthy would stop donating to higher education when hit by higher taxes for World War I. Since only the rich paid significant income tax at that time, the provision cost little and had little effect; in any case deductible charitable contributions were limited to 15% of the taxpayer’s income.

By World War II, income tax had been extended to most of the population and tax-deductible charitable contributions had become major income sources for many charities. Consequently when congress sought to introduce the standard contribution in 1944, to simplify the income tax system for most taxpayers by removing itemized deductions, charities fought the provision tooth and nail.

Today, up to 50% of a taxpayer’s income may be deducted as charitable contributions and the provision is budgeted to cost the revenue US$54 billion in the year to September 2011. In addition, charities’ investment income is exempt from tax, generating a “tax expenditure” estimated at $60 billion, charitable bequests’ exemption from estate tax costs an estimated $10 billion on the annual $24 billion of bequests, and other minor tax exemptions cost $6 billion.

In total, therefore, charitable tax exemptions cost the Treasury about $130 billion, or on the cuckoo 10-year accounting used in budget calculations, some $1.8 trillion over the period 2011-2020 – which would make a decent dent even in that decade’s horrendous budget deficits. In addition, state and local tax exemptions for charities cost $30-50 billion. The charitable contribution income tax deduction is very inefficient according to a 2009 Congressional Research Service (CRS) study of the sector; thus its $54 billion cost increases charitable donations by only about $27 billion.

The nonprofit sector (including religious and cultural institutions) represents a sizeable portion of the US economy. According to the CRS study, nearly 10% of the US workforce works in the non-profit sector, with 7% employed by charities. Non-profit employment increased by 16% between 1998 and 2005. Total charitable revenues were $1.4 trillion in 2008, about 10% of gross domestic product, while charitable assets totaled $2.6 trillion. Including other nonprofit associations, revenues totaled $2 trillion and assets $4.2 trillion.

Private contributions represented $144 billion, 12% of charitable income, government grants and payments totaled $351 billion, private payments for services represented $590 billion, investment income $81 billion and other income $30 billion. Private contributions were most important in arts and environmental charities, representing over 40% of funding for those sectors (albeit only $19 billion in total) while they represented only 2% for funding for healthcare charities, for example.

The differences in charitable giving between bottom and top-income brackets are striking. For example, 41% of charitable donations directed at the poor come from those earning less than $100,000 (almost none of whom itemize deductions), whereas only 14.6% come from the really rich, with incomes over $1 million. The really rich direct 21% of their charitable donations to the poor, directly or indirectly, compared with 30% for the population as a whole.

Employment in the charitable sector is highest in the District of Columbia, with 16.3% of its workforce employed in that sector, then Rhode Island with 13.6%, then New York with 13.3%. At the other end of the scale, Nevada has the lowest charitable employment, at 1.8%, followed by South Carolina, Louisiana and Mississippi, followed by Texas with 4.1% employed by the charitable sector. Colorado, California and Florida are all towards the low end of the scale.

Immediately one fact jumps out at you from this comparison: charitable employment is strongly inversely correlated with economic growth. While there is only a modest correlation between charitable activity and income (Rhode Island is close to the national median income per capita, below Louisiana and Texas) the jurisdictions that have shown the most robust economic growth in the last 30 years are those where charities are least active.

A little Public Choice Theory will tell you that the damaging effect on the local economy of a high concentration of charities is no illusion. The private sector involves resource allocation by those directly benefiting, while government is inefficient because it involves resource allocation by bureaucrats, who do not directly benefit from the outcome.

However, even governments are to some degree subject to popular control. In the case of charities, resource allocation is made by people with a political agenda, seeking to maximize their resource collection from rich people with little knowledge of the problems the charity addresses, whose decision making is obfuscated by incessant misleading charity propaganda. Thus, charitable activity is even more economically inefficient than government, and excessive charitable activity holds back the local economy by diverting resources from the local private sector.

Turning to charities’ internal efficiency, Forbes’ annual study of the top 200 charities for 2010 reported an average of 90% fundraising efficiency and 86% charitable commitment – in other words, for each $1 of donations to the charity 77 cents went to its charitable purpose. Thus, by combining the three ratios above, of the efficiency of the charitable tax deduction, of the percentage of charitable donations that the rich give to the poor and of the efficiency of the charities themselves, you can discover that the $54 billion cost of the charitable contribution income tax deduction results in only about $4.4 billion of benefit to the poor. Not the most efficient use of public money.

Charities are absorbing an ever-higher share of national output. Real charitable revenue increased by 68% in 1995-2005 and charitable donations increased by 68% compared with a 39% increase in real GDP. Apart from charities’ adverse effect on the economy itself, there are a number of reasons why this could be a bad thing:
# The innumerable scams in charitable donations of automobiles and other property;
# The ability of Wall Street hotshots to leverage their social life through “charitable dinners” and other charitable events, a substantial portion of the costs of which are borne by much poorer taxpayers;
# The raucous propaganda and lobbying activities, almost universally in favor of bad public policy, by the charities themselves;
# The uncounted “hedonic” cost to the public as a whole of being subjected to continuous obnoxious fundraising.

Given charities’ averse effect on the economy, their own economic
inefficiency, the great inefficiency of the charitable tax deduction and the disinclination of the very rich to give charitable donations to the poor, it is clear that the charitable deduction should be ended, as should the tax exemption for charities’ income, the tax exemption on their real estate and their other benefits from the public purse. Since excessive charitable activity is economically damaging, such activity should no longer be subsidized by the remainder of the economy.

A major additional benefit of abolishing charitable tax benefits would arise in the management of universities and hospitals. These are basically commercial enterprises that choose non-profit status because of its tax breaks. The removal of the tax breaks should cause most of them to run themselves as profit-seeking businesses, chopping away much of the vast unproductive bureaucracy that they have accreted over the last half century.

Their current non-profit approach, putting political correctness and other shadowy social goals above the efficiency of the enterprise and its benefits to consumers, has wrecked US higher education and caused its healthcare costs to soar uncontrollably. A little free-market sunlight would immeasurably improve them.

While most of the $130 billion saved from eliminating charity tax breaks should go to reducing the excessive federal deficit, some small portion, maybe $20 billion, could be devoted to direct charitable donations by the federal government. If half of that, $10 billion, went directly to the poor it would exceed the $4.4 billion of donations to the poor generated by the charitable income tax deduction. The remaining $10 billion might be wasted, but being public money it would be wasted by representatives of all of us, selected in a democratic manner, and not wasted to subsidize the whims of vulgar plutocrats.

When some leftist billionaire like Warren Buffett calls for higher taxes, or advocates the retention of the estate tax, my blood boils. However worthy the Bill and Melinda Gates Foundation, if as he plans Buffett leaves it a legacy of some $30 billion his estate will pay no estate tax on that amount. That will deprive the Treasury of about $12 billion in revenue, which must be made up by the rest of us, who lack Buffett’s means.

It’s time this subsidization of billionaire social consciences is brought to an end and charities put on the same footing as the rest of humanity. Such a change should boost the US economy, increasing ordinary Americans’ incomes – out of which increase they can, if they wish, make an after-tax contribution to charity, preferably one that benefits the truly disadvantaged.

Ebenezer Scrooge, the true Spirit of Christmas, would rejoice in such a change.

Martin Hutchinson is the author of Great Conservatives Academica Press, 2005). Details can be found at http://www.greatconservatives.com.

(Copyright 2005-10 David W Tice & Associates.)

One Response to Charity Should Stop Here

  1. irtie says:

    Thanks for sharing. Keep writing..

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