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December 13, 2018

Bah, humbug! Here's the 'problem with charitable giving,' according to two physicians.

Daily Briefing

    Don't call them Scrooges, but just in time for the holiday season, physicians Aaron Carroll and Peter Bach have taken to the New York Times to decry "the problem with charitable giving"—namely, that tax-deductible gifts in essence force other taxpayers "to subsidize rich people's donations."

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    In the United States, most charitable donations are tax-deductible, note Carroll, a professor of pediatrics at the Indiana University School of Medicine, and Bach, director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center.

    As such, donors can subtract their contributions from their reported income when they file their income taxes. That lowers their tax bill—leaving other taxpayers "either to pick up the slack or go without the investments that our government could have made with those funds," Carroll and Bach write.

    This shifts financial resources away from publicly funded efforts, which are ultimately accountable to voters, and toward the priorities of individual donors. And that's inappropriate, according to Carroll and Bach: "Deciding how our collective resources should be used … is the job of our government, even if it sometimes makes us sigh in exasperation."

    Carroll and Bach highlight New York University's recent plans to raise $600 million to give future medical students no-cost tuition. Carroll and Bach estimate the government could lose hundreds of millions of dollars in revenue due to tax deductions taken by donors.

    Carroll and Bach write, "We suspect that funding tuition at one expensive New York City medical school, constructing another cancer treatment center in a city already rich with them or building even more research capacity at one of the nation's best-endowed universities is not at the top of most voters' priority lists."

    Wealthier donors may benefit more from charitable giving

    The problem of tax-deductible charitable donations looms especially large, Carroll and Bach write, because donors aren't representative of the public at large.

    In 2016, half of all tax-deducted dollars from charitable gifts in New York came from the top 0.5% of tax filers—those who earned at least $1 million, according to Carroll and Bach. Just 5% came from the bottom 60% of tax filers.

    Further, because high-income individuals typically pay higher tax rates (and are likelier to itemize their tax deductions), their donations reduce government revenue more on a dollar-per-dollar basis than contributions from lower-income taxpayers.

    According to the Tax Policy Center, a $1 donation from someone in the top 1% of earners reduces the government's revenue by 32 cents, while the same donation from someone in the bottom two income quintiles reduces revenue by just five cents.

    What can be changed?

    The tax deduction for charitable gifts is extremely popular, Carroll and Bach write, so simply eliminating the deduction isn't "politically viable." Still, they suggest it might be possible to limit those deductions by lowering the cap on how much of a gift can be deducted from taxes, or by setting a flat percentage of each dollar donated to be used as a deduction credit. The public could also call on people with high incomes to forgo tax deductions voluntarily.  

    Any of these strategies creates a risk of reducing charitable donations—but research suggests that it could increase government revenue more than it reduces giving, Carroll and Bach write.

    "To be clear, we aren't saying that our messy democracy gets spending right all of the time—or even most of the time," Carroll and Bach concede. "Nor are we critiquing the magnanimity of wealthy philanthropists who choose to bestow some of their accumulated wealth on causes they believe will make us all better off. We just think that if everyone has to pay, everyone should have a say" (Carroll/Bach, New York Times, 11/27).

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