This week’s big CBO report on tax expenditures has spurred some interesting secondary analysis. One that should spur some tertiary discussion came from Wonkblog’s Dylan Matthews, who focused on one of those tax policies that primary benefits the wealthiest taxpayers: the charitable contributions deduction.
The social theory behind this deduction, it is usually assumed, is that it operates as a form of redistribution, since the contributions channel dollars to the needy clients of charities—without all that messy government bureaucracy, doncha know. But drawing on a couple of studies, Matthews challenges that assumption dramatically: even using a pretty loose definition of “helping the poor,” he finds that only 30.6% of charitable giving actually goes in that direction.
When you think about it, that makes some sense. All direct contributions to houses of worship are tax-deductible (and many expenditures by these organizations, such as salaries for employees, are also tax-exempt); in fact, that accounts for nearly a third of deductions. Some benefit the poor materially; most don’t. I’d argue that the religious exclusion has less to do with assumptions about charitable intent than with the tradition of state support for Right Religion that dates back to the Middle Ages, when the Catholic Church’s vast property holdings made exemption from taxation the most formidable type of state subsidy. But in any event, today’s tax support isn’t going primarily to the Little Sisters of The Poor.
Then there’s the deductibility of contributions to higher education institutions (13% of total “charitable” deductions). Some of that money helps subsidize college for needy students, but that’s not a condition for the deduction, and you might be surprised at some of the college funds that benefit from this subsidy (e.g., the athletic funds that enable givers to gain the right to buy season tickets for college football).
Beyond these often-worthy but not exactly redistributive purposes, there are, of course, a bunch of foundations and “public-society-benefit” institutions that have the much-prized tax status of 501(c)(3) organizations, entitling donors to a tax deduction. And here can be found fine organizations like the Heritage Foundation, the American Enterprise Institute, the National Right To Life Educational Trust Fund, and the American Legislative Exchange Council, none of whom are exactly know for a devotion to helping the poor. (It should be noted that some (c)(3)s, including the Heritage Foundation and the liberal Center for American Progress, also have affiliated “action funds” that are outside the charitable designation but have the freedom to more directly engage in political activities. These are among the famous 501(c)(4) organizations that have been in the news lately: contributions aren’t deductible to donors, but the organizations themselves are tax-exempt, which also represents a tax subsidy).
Perhaps the CBO study, and even the “scandal” over IRS scrutiny of 501(c)(4)s, will lead to a more serious and comprehensive debate over tax subsidies to both “charitable” and “social-welfare” organizations, which directly and indirectly benefit from public support, arguably because they borrow (or pilfer) from the capital of good will built up by more altruistic enterprises. In any event, we should stop assuming that the “charitable contribution” typically promotes a redirection of resources down the income and wealth ladder.
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