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Giving Accounts II

Submitted by admin on Thu, 10/06/2005 - 21:32
Further discussion has led to some interesting questions about policies designed to foster philanthropy:
  1. In order to avoid taxes, rich people put a lot of money into personal foundations, which then give grants to non-profits. That sounds nice, because non-profits are supposed to be altruistic by their very nature, but a cursory look at the landscape of tax-free organizations out there reveals a lot of think-tanks and other research or advocacy organizations that are as far away from soup kitchens as you can get. This is not so much a problem with the idea of non-profits as it is with the rules governing what kinds of organizations are tax-free. Unfortunately, the boundary between organizations that are really not-for-profit and those that are political engines in disguise is fuzzy. So, should there be a cap on the tax-deductible amount you can give to a non-profit? You could still give as much as you want, of course -- it just starts being taxed when you go past the tax-deductible limit. This is an interesting example of framing for me. Depending on how I approach the idea, it either repulses or delights me. George's analogy for this is the Necker Cube: you can see both interpretations of the necker cube (either the front face of the cube is on the lower left or it's on the upper right), but you can't see them both at once. In the same way, when I think about the crucial function played by charitable giving in America, I'm horrified at the idea of disincentivizing it, but when I think of rich folks dodging their fair share of taxes, I think a policy like this could restore the balance between the two sectors of society. Can't see it both ways at once. At the bottom, though, I think it's a good idea.
  2. The converse observation is that the standard deduction on income tax is somewhere around $5,000 right now. This translates to a floor on tax-deductible donations. Suppose Dick and I make the same amount of money, but I donate $4500 every year to charity and Dick donates nothing. Because the standard deduction is more than the amount I donate, we both deduct the same number from our income when we do our taxes. I don't pay less tax than him until I donate more than $5000 (a substantial chunk of income for most people). I don't think most people are motivated to give to charity because of tax write-offs, but even if they were, they'd be foiled by the current tax law. So, should the standard deduction be eliminated? If it were, the tax tables could be adjusted to account for any upheavals this would cause (i.e. poor people would be paying a lot more in tax, unless rates were lowered to account for the fact that everyone's registering more income). Is it inconsistent to have a floor on tax deductions, but not a ceiling?
  3. Should giving-account administrators really be prohibited from restricting the types of organizations to which their members can contribute? In my mind, these accounts should operate no differently than a bank account set up the same way. A bank can't tell you how to spend your money. But suppose Focus on the Family becomes a giving-accounts administrator. Any employee who has an account with them can only give to their pre-approved list of right-wing/religious charities. If the employee wants to donate to another charity, nothing's stopping them from doing it the old-fashioned way. And suppose Wal-Mart decides to use them as their giving accounts provider. Well, shouldn't they have that choice? Should giving accounts administrators be prohibited from using that as an axis of competition? In my mind, giving accounts should operate no different from a bank account set up in a similar fashion. Because employees could donate to any organization they want from their own bank account, they should be able to do it from their giving account, and that restriction should be enforced. So I don't think Wal-Mart should have that choice, because this isn't a question of choice. I don't think left-leaning organizations should restrict their employees' giving account options either. And yet, it's not cut-and-dry at all.
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Submitted by Frank (not verified) on Tue, 11/22/2005 - 15:53.

To respond to the three points:
1. The IRS designation of a charitable non-profit known as a 501(c)3 is broadly defined and loosely enforced. The onus is really on government to set realistic guidelines and to conduct periodic reviews of these entities that they are fulfilling their philanthropic, religious, or educational functions. Right now, it takes a pretty egregious violation to get regulatory attention. As a result, some of these organizations have crossed the line into partisan political advocacy, fronting for for-profit subsidiaries and then hiding the financial gain, and lining the pockets of the top executives. A periodic audit of non-profits (over and above what they report on tax returns) with a public reporting function might alleviate some of these abuses.
2. Charitable donations are only one of many potential itemized deductions on individual tax returns. Once you start paying mortgage interest, incur medical expenses, alimony, state income tax, etc., the threshhold for claiming a charitable deduction becomes much lower so that the incentive to give even modest amounts is enhanced.
3. People use family foundations and donor advised funds (through third party agencies) to accelerate their donations, particularly of appreciated assets, and then designate non-profits to receive donations in amounts and at time intervals that the donor specifies. Foundations have had to be coerced to give away 5% of their total valuation (assets plus earnings) on an annual basis, but it is reasonable in most years when earnings average well above that rate. While giving philosophies may differ among donors and may be at variance from what others consider humanitarian impulses, it is still better than handing off that responsibility to others with their own agendas. It is a reason that many large and small donors have abandoned the United Way model (coerced by some employers on their workers), which has been shown to be subject to mismanagement and corruption.

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Submitted by Alexis (not verified) on Mon, 10/10/2005 - 17:21.

Further to the layout thing, fixed-width layouts are silly. Very not flexible to the device.

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Submitted by Alexis (not verified) on Fri, 10/07/2005 - 06:44.

(I just noticed that your site layout is too wide for my tablet.)

It seems like it would be easier to just not lump charitable contributions in with the standard deduction rather than eliminate it, if need be. I was at first thinking that might make a big difference, if your amount dropped you out of a tax bracket, but then I remembered about marginal taxation.

The proposition of a ceiling for tax-deductible stuff doesn't make sense philosophically. We don't tax people on income they don't have, and they don't have stuff they gave away to someone who can't give them anything in return (non-profits), so making them pay tax on it doesn't "restore a balance". The people may be rich and tax-dodging, but they are less rich by the amount of money they give away, so taxing them on it doesn't make sense to me.