Standing Up for the Charitable Tax Deduction Is Standing Up for a Healthy Society; or Reframing away from giving a tax break to the rich


In a comment on my post from last week about framing, John Carnwath honed in on a comment I sort of tossed off about the threat to the charitable deduction posed by the fiscal cliff.  Take a look at his comment, which is very well laid out—he notes that while the tax deduction for charitable giving is surely and important driver for the arts, he’s not convinced that, given the topic of the post, a frame that suggests favoring the wealthy with a “tax break” is the best idea.  He notes that, “while eliminating tax deductions would undoubtedly be devastating for many arts organizations, I can’t help thinking that something positive might come out of it, too.  Might it be easier for us to adapt to the changing society around us if we weren’t dependent on gifts from our generous donors (wealthy, old, white) and the indirect government subsidies that come along with them?”

I think this is a really hard issue, and that John’s question about the framing of it is really important.

The truth of the matter is, individual charitable donations to the arts are crucial to the survival of most organizations—moreso, actually, than for other types of nonprofits, according to a 2003 report from Grantmakers in the Arts.  For the sector overall, the GIA report estimated at the time that about 50% of all contributed income is from individual donations.  According to the 2012 Giving USA Annual Report, as quoted by Independent Sector, total charitable giving was just over $298 billion in 2011, of which about 4%, or just shy of $12 billion went to arts organizations.  About 73%, or $217 billion of that giving, came from individuals—which means that about $9 billion in individual donations came into the US arts sector in 2011.

The fact is, individual donations prop up the arts sector in a way that would mean a serious deflation and reduction in organizations if those donations were to drastically decrease.

Which gets us to the proposed limitation on the tax deduction for charitable giving.  Currently, the deduction allows individuals to claim deductions of up to 50% of their adjusted gross income on their taxes as long as they itemize their tax returns.  Per the Christian Science Monitor, and to John’s original point, these deductions are primarily taken advantage of by the wealthy—only about 30% of all taxpayers itemize their returns, and the majority of those people are in the highest tax brackets.  In addition, while about 65% of all households give to charitable causes, according to the Indiana University Center of Philanthropy, the top 3% of earners (those making over $200,000 in annual income) contribute nearly 45% of all donated dollars, and so are therefore disproportionately advantaged by the deduction.

The idea of capping deductions emerged, interestingly, out of the Romney camp during the presidential election.  Romney, who of course was unable to propose tax increases, suggested a $17,000 cap on total deductions as a way of increasing revenue without raising taxes.  As this article from the Washington Post notes, $17,000 is a really, really easy number to hit—and not just for the top 3% of earners.  As the article notes, “The typical household gets about $15,000 chopped off its taxable income from the employer health-care exemption alone, so many families would hit the $17,000 limit very quickly.”

According to the Wall Street Journal, in 2011, Mitt Romney claimed $2.25 million in charitable deductions.   It is hard to argue that, given that reality, and even understanding that Romney is in the top percent-of-a-percent of earners in the United States, a reduction from 50% of total earned revenue to $17,000 would not be a boon to a cash-strapped government.  And yet…

Let’s assume that those top 3% of earners all made exactly $200,000 in 2011—this is a flawed thought experiment, but go with me.  Three percent of the total adult US population is currently about 7.5 million people, and each of those people would go from being eligible to deduct up to $100,000 (50% of their total income) to deduct $17,000.  If everyone was giving at their maximum, that would mean going from $750 million in potential charitable deductions to about $127 million.  Assuming that the deduction is actually a driver of giving, and that not getting it is a deterrent to giving, that’s quite the decrease in potential contributions.

Barack Obama’s current proposal, which is being floated (and considered strongly by both parties) in context with the fiscal cliff negotiations, is to reduce the percentage from 50% to 28%.  This, of course, is less drastic, but it still means a potential 50% loss in deductions, and, again with the assumption that the deduction drives donations, a whole lot of lost contributed revenue in the years to come.

So, does the deduction actually drive charitable giving?  According to the Christian Science Monitor, the research on that question is relatively mixed.  The latest seems to say that the overall effect of the deduction is small, but is largest with the richest donors, which means that the effect of changing the deduction might hit disproportionately since those are the donors who are likely to give the largest gifts.

All of that said, let’s get back to the framing question.  To me, what John poses in his original comment is a crucial distinction: are we arguing for a tax break for the wealthy, or are we arguing for a society that rewards contributions to organizations devoted to the social good?  For me, both practically and rhetorically, I think if we aren’t arguing mostly for the second case (public support of the social good) then it’s only because we’re so used to arguing with economics in hand that we’ve forgotten how much that particular blade can cut both ways.

Arguing for the tax deduction for charitable giving isn’t about saving a vibrant cultural (and religious, and environmental, and health, and poverty, and etc) sector from ruin, although that would be a major, major benefit.  Arguing for the tax deduction, or at any rate arguing for a mechanism to reward civicly-minded individuals who wish to support the social welfare by giving their money freely, is about reminding the government of the importance of societal well-being as a lubricant that keeps the more profitable cogs and wheels of our industry moving healthily and with care.  Encouraging private support of the arts, and all the not-for-profit sector, is encouraging the responsibility of the population for its emotional and empathetic health, its future and its past.  By cutting into such encouragement, by removing the signal from our government that such support is a good and powerful and necessary act for the public good, politicians are yet again turning their backs on what has always made our country great—our ability to lift each other up, heal each other, remind each other of our best and our worst, and carry ourselves forward in hope.

This blog is devoted to the idea that talking about the instrumental benefits of the arts isn’t the only, or even necessarily the best, way of talking about the value of the arts.  By that same token, talking about the finances of arts organizations in context with charitable tax deductions instead of talking about what it say about our society that we might be considering taking them away is, I fear, small, and will not get us where we want and need to go.  John was very right, in that context–while I don’t know that the particular nature of arguing for a “tax break” is a poor frame, arguing for it without explaining what such government imprematur might mean for that “tax break” is giving up the war for a particularly difficult battle.

I’ve made that argument to my senators and representatives, and I suggest you do the same.  Americans for the Arts has set up an easy way for you to do just that, and it only takes two minutes.  These fiscal cliff negotiations are taking place now, behind closed doors, and if we’re interested in making sure that in saving our financial souls the politicos don’t accidentally do lasting damage to our more general well-being, we must let them hear what we have to say, now.

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  1. says

    Well said.

    At my own theatre, we’ve stressed all of that, only talking about tax deductions when asked about them. More than a few patrons & sponsors have appreciated that, especially the more business-minded ones–it shows “focus.” Is your focus on raising money or making the art? Is your focus on building a fancy building or making the art to go inside that building?

    The way we present ourselves to patrons and potential supporters says everything about our goals, missions, ideals, however you want to phrase it. When we lead with “but you’ll get a great tax deduction,” what does that say…?

  2. John Carnwath says

    I’d just like to clarify my position, lest the more sincere and subtle point I made in my previous comment (proposing a shift in focus from preserving the tax deduction for donors to retaining the indirect government subsidies that are currently provided through that mechanism) be overshaddowed by the more provocative and controversial suggestion that besides being devestating to many arts organizations, eliminating the tax break might also have some positive effects for the arts.

    I find J. Mark Schuster’s explanation of the situation helpful (Handbook of the Economics of Art and Culture, ed. Ginsburgh/Throsby, 2006). Schuster distinguishes between three components of a charitable donation: there is a “base gift” (the amount that the donor would give whether or not they receive a tax deduction, simply to support the cause), the government’s tax expenditure (the tax revenue that the government foregoes through the tax deduction – functionally, an indirect government subsidy to the designated charity), and the “induced gift” (the additional amount the donor gives to charity as a result of the tax incentive).

    The way that Clayton frames his argument, it appears that he is primarily concerned with the induced gift: If we take away the tax incentive, this will set a sign that we as a society don’t value (and support) charitable behavior and people will scale back their charitable giving. However, as he notes, studies that have tried to measure how strongly people’s willingness to donate to charities respond to tax incentives (in economic terms, the price-elasticity of charitable giving) have come to mixed conclusions. At this point, our best guess is that it might be slightly positive, meaning that if donors are offered an additional 1% in tax savings, they will be willing to increase their donations by slightly more than 1%. (The wealthy tax payers who are most likely to give to the arts may be more responsive to the incentive than others.) This means that the “induced gift”–the amount that donors add on to their gift beyond what they expect to get back from the government–is relatively small compared to the the government’s tax expenditure.

    What I’m suggesting is focussing on the tax expenditure and shifting our efforts from preserving the tax deduction to preserving the (indirect) government subsidies for the arts. That is, if the tax deduction is eliminated, we should try to ensure that the additional tax revenue that is generated should still be invested in arts organizations. I believe this approach would maintain the bulk of our contributions (the “base gifts” and the “tax expenditure”), and it also avoids the awkward situation of having to defend a tax deduction that primarily benefits the wealthy.

    I imagine it would be politically difficult to earmark government subsidies that have been indirect in the past and turn them into direct subsidies distributed through government agencies like the NEA. However, one might propose a donation matching program that incentivizes charitable giving by individuals that is entirely separate from the tax code. This would have the benefit that even the 70% of the population who don’t itemize their deductions would be able to steer government funds towards the organizations that they support.

  3. Christina says

    John gets it right again. When our European colleagues lament their relatively low levels of private donations, we always have to remind them of the “trade” we’ve made with our government – indirect subsidies for direct ones.

    I wonder what would happen to our donors who view their annual contributions as the cost of gaining their preferred experience with us, regardless of the tax code? That is, there are some donors who contribute not just because they believe in us OR because the tax code incentivizes them but because they prefer to have the “no cash value” experiences that we reserve only for them: The access to patron lounges (where they can see and be seen), the dress rehearsal passes, the priority ticketing services, the backstage tours. If we began to simply charge fees for these incidentals, how much could we charge? And would the same people pay? Would we raise more? Could we simply switch to a Broadway-style “priority tickets” model and essentially let the market set the price for the very best seats and/or good seats at the very last minute? Perhaps this is just the final manifestation of the way we have already begun to commoditize each element of the in-house experience. To the point made on the previous post, this is very much what professional sports venues have done. I’m not at all sure that it would make us any less primarily dependent on the (rich, white, wealthy) folks with lots of disposable income. But would transparency in pricing make us look less elitist? After all, the price of a center orchestra ticket to a really hot show is frequently not just the face value $200. It’s that plus the $10,000 contribution that gives you access to purchase it. I realize that not all organizations are blessed with the problem of having such highly desirable ticketing, but most know the experience of at least occasionally becoming someone’s new best friend when you have a hot show.

  4. Brian Beirne says

    I really appreciate John Carnwath’s follow-up, particular his description of the Clayton model. Donors give (and on the commercial side theatrical investors for the most part invest…) because of their passion for the art. They are not fishing around looking for a tax deduction.

    Particularly at the end of the calendar year we hear pitches for contributions based on the opportunity to get a smaller tax bill. That’s a pretty weak argument: “give us money so you can avoid giving it to the government.” But it’s a shorthand we have grown accustomed to.

    I do think donors will continue to give, but I think in their calculation of what they can afford to give, they now will give less, as they have less to give. This goes to Carnwath’s “induced gift,” that in fact charities are the ones currently subsidized by the government forgoing tax revenue.

    So the charitable deduction is not about tax breaks for the wealthy, it’s about encouraging philanthropy. I think the philanthropy will continue regardless of changes to tax law, though the nature of the philanthropy will definitely be affected.