Tax and Charity
End of the Income Tax Would Increase Charity
By Daniel G. Jennings
Contrary to popular belief, abolishing the federal income tax and adopting a national sales tax such as the Fair Tax* would increase the amount of money donated to charities.
The standard argument given by income tax apologists is that a lot of people donate to charity for tax deductions. This of course is true, a lot of people get tax deductions by donating but most charitable giving is motivated by other factors.
Stanford Business school writer Robert Reich estimates that 60 percent of the money donated to American charities goes to religious entities.** So most of this charity is motivated by faith not by a desire for a deduction. Since people are not going to stop believing or supporting their houses of worship after the income tax is abolished these donations are not going to stop.
Other charitable donations are motivated by a desire to help or interest in a particular cause. People give money to a drive to fund research to cure a disease because somebody they know has that disease. Or to victims of a disaster they see on TV. Since compassion isn’t about to disappear neither will these donations.
Then there is the fact that contrary to popular belief most charitable donations in America are made by working and middle class people who receive no tax benefits from giving. Studies indicate that working people give more and a greater percentage of their income than the wealthy.
It is hard to determine how much different social classes give because a large percentage perhaps a majority of Americans who make charitable donations don’t itemize those donations. Most Americans make their contributions on an informal ad hoc basis, they drop money in the collection plate or in a collection jar at the super market. Or they buy cookies from a local kid or the folks at the table in front of Wal-Mart very few of them remember how much they give or to whom they gave, let alone itemize it.
To make matters worse people who itemize may actually donate less than those who don’t. To see my point, take the hypothetical example of two imaginary ladies: Alice the waitress and Juanita the real estate agent. Both Alice and Juanita are hardworking and devout church goers. Both give around $2,000 a year to their church but they do it differently. Alice gives the old fashioned way - when she has a few extra bucks say from tips she drops some of them in the collection plate. Juanita writes checks to the church so she can have a record of her giving for an itemized deduction.
This means that Juanita will be able to deduct 35 percent of her deduction from her income tax so she’s actually only donating $1,300. Alice who doesn’t itemize her cash contributions donates the full amount. Although on paper it looks like they’re donating equal amounts, the working woman is actually donating more money to the church than the business lady and receiving no tax benefits for it. This obviously isn’t fair or just.
Okay, now some people will say can’t Alice just start itemizing her donations and get the benefit? If Alice were receiving her income from a salary that might be possible, but remember Alice is a waitress. Much, if not most of her income comes in the form of cash tips. If she were to itemize there’s a good chance she would increase her reportable income and her family’s tax burden. If she doesn’t itemize, Alice can keep all the extra tip income and use it to improve her family’s lifestyle and support her church.
What this demonstrates is that if average people are allowed to keep their entire paychecks they can’t under our current tax system. They would have more money to spend and more to donate to charity. Charitable donations would increase dramatically under a system such as the Fair Tax because the people who do the giving would have more to give.
*www.fairtax.org
** For a detailed account of how tax inspired charity actually hurts the poor and helps the affluent see Reich’s paper “A Failure of Philanthropy: How American Charity Shortchanges the Poor and Public Policy is Partially to Blame” in the Stanford Social Innovation Review’s Winter 2005 issue. It was included in the Stanford Business School’s Knowledgebase Newsletter for February, 2006, and is available online at www.gsb.stanford.edu
By Daniel G. Jennings
Contrary to popular belief, abolishing the federal income tax and adopting a national sales tax such as the Fair Tax* would increase the amount of money donated to charities.
The standard argument given by income tax apologists is that a lot of people donate to charity for tax deductions. This of course is true, a lot of people get tax deductions by donating but most charitable giving is motivated by other factors.
Stanford Business school writer Robert Reich estimates that 60 percent of the money donated to American charities goes to religious entities.** So most of this charity is motivated by faith not by a desire for a deduction. Since people are not going to stop believing or supporting their houses of worship after the income tax is abolished these donations are not going to stop.
Other charitable donations are motivated by a desire to help or interest in a particular cause. People give money to a drive to fund research to cure a disease because somebody they know has that disease. Or to victims of a disaster they see on TV. Since compassion isn’t about to disappear neither will these donations.
Then there is the fact that contrary to popular belief most charitable donations in America are made by working and middle class people who receive no tax benefits from giving. Studies indicate that working people give more and a greater percentage of their income than the wealthy.
It is hard to determine how much different social classes give because a large percentage perhaps a majority of Americans who make charitable donations don’t itemize those donations. Most Americans make their contributions on an informal ad hoc basis, they drop money in the collection plate or in a collection jar at the super market. Or they buy cookies from a local kid or the folks at the table in front of Wal-Mart very few of them remember how much they give or to whom they gave, let alone itemize it.
To make matters worse people who itemize may actually donate less than those who don’t. To see my point, take the hypothetical example of two imaginary ladies: Alice the waitress and Juanita the real estate agent. Both Alice and Juanita are hardworking and devout church goers. Both give around $2,000 a year to their church but they do it differently. Alice gives the old fashioned way - when she has a few extra bucks say from tips she drops some of them in the collection plate. Juanita writes checks to the church so she can have a record of her giving for an itemized deduction.
This means that Juanita will be able to deduct 35 percent of her deduction from her income tax so she’s actually only donating $1,300. Alice who doesn’t itemize her cash contributions donates the full amount. Although on paper it looks like they’re donating equal amounts, the working woman is actually donating more money to the church than the business lady and receiving no tax benefits for it. This obviously isn’t fair or just.
Okay, now some people will say can’t Alice just start itemizing her donations and get the benefit? If Alice were receiving her income from a salary that might be possible, but remember Alice is a waitress. Much, if not most of her income comes in the form of cash tips. If she were to itemize there’s a good chance she would increase her reportable income and her family’s tax burden. If she doesn’t itemize, Alice can keep all the extra tip income and use it to improve her family’s lifestyle and support her church.
What this demonstrates is that if average people are allowed to keep their entire paychecks they can’t under our current tax system. They would have more money to spend and more to donate to charity. Charitable donations would increase dramatically under a system such as the Fair Tax because the people who do the giving would have more to give.
*www.fairtax.org
** For a detailed account of how tax inspired charity actually hurts the poor and helps the affluent see Reich’s paper “A Failure of Philanthropy: How American Charity Shortchanges the Poor and Public Policy is Partially to Blame” in the Stanford Social Innovation Review’s Winter 2005 issue. It was included in the Stanford Business School’s Knowledgebase Newsletter for February, 2006, and is available online at www.gsb.stanford.edu
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