(MintPress) – As the New Year approaches, Americans are flooded with reminders that the holiday season is a time to be grateful of one’s own blessings in life and to give to and remember those who are less fortunate. But as the end of the year nears and federally recognized nonprofits advocate for the public to donate before the New Year so the donation can be claimed on this year’s taxes, the season of giving begins to sound more and more like the season to be greedy.
One of the biggest offenders when it comes to greedy charitable givings are wealthy Americans.
As a study by Charity Navigator puts it, how else can one explain why 10 percent of annual donations for charities are processed in the last two days of the year, with a significant spike between noon and 7 p.m. on Dec. 31, if the donations have nothing to do with the charitable tax deduction?
Dr. Katherine Loflin, principal of Loflin Consulting Solutions, told MintPress that why people give is a question that comes up this time of year. “I’ve talked to wealthy and middle-income [donors]. Sometimes the motivation is the tax deduction, but it also comes from other places.”
Loflin also added that those persons working in philanthropy like herself are grateful for investments no matter the reason behind the donation.
Loflin said when it comes to charitable tax deductions, wealthy Americans include anyone making $200,000 or more. She adds that the wealthy take advantage of the deduction more than other economic groups and are responsible for about 41 percent of all donations made to nonprofits, but she added that nonprofits recognize middle class and poor Americans give more of their disposable income than the wealthy.
“There are other socioeconomic groups that are big givers, even larger givers if you think about how much they have to give.”
For example, when GOP presidential hopeful Mitt Romney released his 2011 tax returns, the Republican Party and his campaign jumped at the chance to compare Romney’s donation of 29.4 percent of his income to charity, to the 21.8 percent President Obama gave that same year.
But in the Nation’s 2012 election coverage, Republican politics and conservative media contributor Ben Adler wrote, “The notion that the Romneys are necessarily more generous than the Obamas is false for a few reasons.” He argued that because the Romneys make more money than the Obama’s they should give a higher proportion of their income to charity.
Examining the charities Romney gave to, Adler remarks it’s clear that his donations are to charities he is selfishly interested in, such as the Mormon church and his alma mater Brigham Young University. And as Adler continues, donating money so your church can get a new stained glass window is considered a donation to charity for tax purposes, but it’s not a charity in the colloquial sense. “He gave virtually nothing to any program that focuses directly on feeding the hungry, housing the homeless or educating the disadvantaged.”
Just like every other tax incentive and deduction, Congress has suggested a few proposals in its attempt to prevent the so-called fiscal cliff that include altering the charitable tax deduction. Instead of raising taxes, President Obama has proposed that Congress increase revenue by raising income tax rates for Americans earning $400,000 or more. The Washington Post reported that several charities are in support of this change, even though their boards are often staffed with wealthy Americans.
However, the charities are not on-board with Obama’s proposal that the charitable deduction for high-income earners is reduced. Specifically, the United Way, American Red Cross and Lutheran Services in America have publicly opposed the tax limitation.
By the wealthy, for the wealthy?
Studies have found that when donors receive an economic benefit, such as a tax deduction, the size of the donation amount is influenced, usually positively. But charitable tax deductions don’t benefit all Americans equally, and only those who know to itemize their deductions reap the charitable giving benefit.
Joe Thorndike, director of the Tax History Project at Tax Analysts, told American Public Media’s Marketplace program that since wealthy Americans were the only Americans who paid income taxes, the charitable tax deduction was originally designed to benefit them and only them.
Though the tax base broadened a few years later to fund World War II, which allowed more Americans the ability to use the charitable tax deduction, Thorndike says the deduction still benefits the wealthy more than any other group. “The richer you are, the higher the tax bracket you’re in, the more you get back. Someone in the 35 percent tax bracket gets a $350 break for a $1,000 charitable donation. Someone who makes less money and is in the 25 percent bracket gets less, only $250.”
The deduction is still in effect today, but it’s now justified as “an appropriate adjustment to income according to a person’s ability to pay,” even though a recent study found that “Americans give not out of empathy, but for tax write-offs” and concluded that if the U.S. implemented “a flat tax or a national sales tax where charitable write-offs are eliminated, donations would drop by nearly a third or more.”
In other words, since charitable contributions reduce the amount of funds available for personal consumption or payment to the government as a tax, a person who gives away their earnings now has less of an ability to pay the full amount of taxes they owed and should be treated equally to someone with the same income net of the contributions.
Due to the imbalance in benefits from the charitable tax deduction, wealthier Americans donate more than those with more modest earnings. As a result, charities favored by wealthier Americans, such as those related to health, education, art and the environment, benefit more than religious organizations and charitable organizations that work to help poorer Americans meet their basic needs such as the United Way.
But it’s not just unfavored charities that suffer from wealthy Americans receiving the tax deduction. As Joshua Eison explained, by diverting funds into a charity instead of to the IRS, a person will “benefit from the tax write off, the charity benefits from the donation … but the IRS lost $100,000 that was owed. The government lost in that transaction. IRS income is used to fund federal programs such as Medicare, Welfare, Social Security and Disability Benefits.”
Even though there is a maximum charitable deduction of 50 percent of an individual’s annual adjusted gross income, Congress’s Joint Committee on Taxation estimates the government will lose about $230 billion in tax revenue from 2010 to 2014 because of charitable giving tax deductions.
Using the charitable tax deductions to reduce the amount of tax payable is recognized as a form of tax avoidance, but it’s legal since the taxpayer/donor is simply using the tax code to their advantage.
However, as Eison points out even if someone was illegally claiming charitable tax deductions, there are at least three departments of the IRS that would have to come together and connect the dots to charge someone with tax fraud or tax avoidance. Since the IRS handles the taxes for every citizen, business and NPO in the country, Eison admits that the odds of catching those persons is pretty slim.
Urban Institute reported that in recent years the IRS has audited less than 1 percent of returns, and with “limited enforcement resources,” it has been difficult for the IRS to enforce the charitable deduction laws.
MintPress requested clarification from the IRS on the amount of charitable deduction fraud the IRS sees every year, but they continued to direct us to their website, which did not have clear information.
Selfless giving
There are some notable exceptions. For example, renowned American entrepreneur and philanthropist Andrew Carnegie, said that the rich have a moral obligation to give away their fortunes.
In “The Gospel of Wealth”, Carnegie wrote that he believed “all personal wealth beyond that required to supply the needs of one’s family should be regarded as a trust fund to be administered for the benefit of the company.” But philanthropists like Carnegie appear to be a rare breed.
Each year, America’s Top 50 donors are recognized as the “most generous or charitable” persons in the U.S. These wealthy men and women are applauded for donations amounting to millions of dollars, but besides the amount donated and a generic reference to which organization the money went to, the public is left wondering what the real reason behind the donation was. Whether it was a tax break, a business deal or just out of the kindness of their hearts, it’s likely the real reason behind these large donations will remain forever unknown.
Loflin told MintPress that the decision to give also comes from how Americans were raised. “People gave because it was a value that was ingrained in them. Many people are surprised to learn that if they give that it’s a charitable investment – it’s just seen as the right thing to do.”
Charitable tax reform
Since Obama first proposed capping the value of charitable tax deductions for the wealthy from 35 to 28 percent in 2009, more than 60 nonprofit groups have spent at least $21 million in lobbying efforts to maintain the current legislation.
Jatrice Martel Gaiter, executive vice president for external affairs at Volunteers of America, said if the charitable tax deductions were reduced, the effects would be “devastating,” which is why the organization has spent almost $200,000 on lobby efforts regarding the legislation. “Of course people want to say they are giving out of the goodness of their hearts, and of course they are, but the tax deduction makes our hearts larger and our goodness even better,” Gaiter said.
Joseph Minarik, a former top economist in Bill Clinton’s Office of Management and Budget who is now director of research for the Committee for Economic Development, warned that “caps cause problems” as “high-income individuals could decide there is no reason to give.”
Libertarian economist and senior fellow at the Cato Institute, Daniel J. Mitchell recently argued in favor of dismantling the charitable tax deduction in an article for the Washington Post: “For all the praise it gets, there’s just no evidence that the tax break leads people to increase their giving—but it does lead them to make bad choices about giving. What’s more, it favors a segment of the public, the very wealthy, that can afford to give without a break. And cutting the deduction does a lot less economic harm than other ways of raising tax revenue.”
Giving the rebuttal to Mitchell’s perspective was Diana Aviv, president and CEO of Independent Sector, the national leadership network for America’s nonprofits, foundations and corporate giving programs, who says the deduction should be viewed as and called a charitable “incentive.”
She wrote: “This bit of tax law is a crucial incentive that gets people to give, and give deeper than they otherwise would. Limiting it—or worse yet ending it—would rob funds from nonprofits at a time when charities are already struggling to meet increased demand for programs and services. It would also curtail one of the few government policies that encourages people to be generous with their money instead of using it for their own gain.”
Loflin agreed with Aviv. She told MintPress that reducing the charitable tax deduction has “potential to affect giving across the sector — those in the middle and low income givers … It won’t affect one population more than another.
“Congress has been chipping away at the deduction for a while now. I recognize there are a lot of competing demands right now on where we as a country can spend money … but I think if you look at the charitable investment deduction itself, it’s not so amazingly generous to the taxpayer.”
Loflin added most nonprofits won’t take as big of a “hit” if the charitable tax deduction is reduced as most are reporting, but said there are some nonprofits that will take a big hit.
The deduction is “not the straw that’s going to break the camel’s back,” Loflin added. “Nonprofits are struggling to meet the demands of a bad economy and natural disasters. Nonprofits step in when the government can’t.” If the government reduces the charitable tax deduction and nonprofits receive fewer donations, Loflin warned that the government will have to be ready to step in and help the nonprofits fill the American people’s needs.
The 411 on 501(c)(3)’s
Hoping to ensure charitable giving was not discouraged while income tax levels were at their highest, 77 percent, during World War I, Congress enacted the charitable contribution deduction in 1917 — four years after the income tax was implemented. Their concern was that people may ration that if they gave money to charity, they wouldn’t have enough money to pay their taxes, especially since taxes in the U.S. were originally collected at the end of year, and not withheld throughout the year.
According to the IRS, a tax-exempt nonprofit, which is also commonly referred to as a charitable organization, is a company that “must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not be an action organization, i.e., it may not attempt to influence legislation as a substantial part of its activities and it may not participate in any campaign activity for or against political candidates.”
Funding for nonprofits comes from three major sources: fees charged, government grants and charitable giving. While the money generated from charitable giving campaigns only amounts to about 10 percent of nonprofit organizations’ revenue, it remains an important aspect of sustaining charitable organizations.
Because the U.S. government supplies less financial support for nonprofits than many other governments, deductions were also seen as a way society could decide what they valued most, i.e., the arts, education, health.
According to a study by the Urban Institute Center on Nonprofits and Philanthropy, the “promotion of giving is also viewed as a way that a capitalistic society reduces the tensions that arise from the unequal distribution of power and wealth. The power of the wealthy may be less threatening if they adhere to a social norm of eventually sharing a significant part of their gains.”
In order to lessen personal tax burdens, many Americans opt to make charitable contributions. But as some Americans have experienced, in order to legitimately claim a charitable deduction, even if the donation was worth millions, the donor must receive a qualified “contemporaneous written acknowledgement” from the charity.
According to Smart Money, the acknowledgement must include three items in order to be considered valid: “the amount of cash you donated and a description of any assets other than cash that were donated; whether the charity provided you with any goods or services in exchange for the donation (other than intangible religious benefits); and a description and good-faith estimate of the value of any goods or services provided by the charity in exchange for your donation.”