If the current proposed tax reform plan is passed without amendment, the philanthropic sector will incur a dramatic hit, with vast and negative unintended consequences.
Because of the Founding Fathers’ desire for small government, the philanthropic sector exists to fill the needs not met by either the government or private for-profit sector. The titan of industry Andrew Carnegie stated in 1889, that through philanthropy “the surplus of wealth of the few will become, in the best sense, the property of many, because administered for the common good, and this wealth passing through the hands of the few can be made a much more potent force.”
The sector — which encompasses over 1 million 501(c)(3) organizations, employs one-tenth of the U.S. workforce, and provides opportunities for education, arts, health care and other social services — relies heavily on individual giving. In 2016, individuals provided almost $282 billion in charitable gifts, about 72 percent of all gifts made to nonprofit organizations.
While very few individuals list tax benefits as the primary reason for making a charitable gift, the fact remains that when government incentivizes the gifts, Americans are more likely to give, and give more.
While neither the White House nor Congress has proposed to repeal the charitable gift deduction, some potential changes to the tax code will discourage giving, including: Cutting the top marginal tax rate to 35 percent, doubling the standard deductions for individuals and couples, and repealing the estate tax that is levied on the richest individuals.
A study commissioned by the nonprofit advocacy group Independent Sector that was conducted by the Indiana University Lilly School of Philanthropy partnering with the conservative think tank, American Enterprise Institute, found that reducing the top marginal rate to 35 percent would result in a decline of $2.1 billion in charitable giving.
Even more troubling for charitable giving would be increasing the standard deduction. The nonpartisan Joint Committee on Taxation estimates that under the proposed change only 5 percent of American households would itemize their income taxes, down from 30 percent currently. This dramatic change would reduce charitable giving by $11 billion annually, a significant hit to an industry that represents 10 percent of the workforce and will surely be asked to do more as the federal budget is cut to balance the decrease in revenue.
In Carnegie’s vision, repealing the estate tax would have little bearing on philanthropy as he favored giving away wealth during a lifetime, saying, “the man who dies thus rich dies disgraced.” Most transformative gifts are made late in life when the donor no longer needs the assets. For the wealthiest Americans, the estate tax is certainly an incentive to make larger gifts.
I implore Congress to consider these consequences, as unintended as they may be, as it continues discussions on reforming the tax code. If Congress continues on the current course, it should adopt changes that safeguard charitable giving.
During the 2016 presidential campaign, then-candidate Donald Trump proposed capping itemized deductions, including charitable gifts, at $100,000 for individuals and $200,000 for couples, but the current proposal does not include that provision and discourages gifts from the wealthy.
The Lilly School of Philanthropy study finds that a universal charitable deduction for all taxpayers, not just those who itemize, would increase charitable giving regardless of the rate being lowered or standard deduction doubled.
The philanthropic sector has played an important role throughout America’s history and is an essential element of the civil society that must be protected.
Matt Osborne is director of leadership gifts at Centre College in Danville.