Another round of COVID-19 relief from Congress is on life support but not dead, as centrist Democrats have begun to pressure Speaker of the House Nancy Pelosi toward compromise. That would mean finding some middle ground between the $3 trillion House “HEROES Act,” with its bailout for profligate blue-state governments, and the Republican $500 billion “skinny” bill. If serious negotiations do ensue, there is one provision on which Senate Republicans should not budge: a strong new form of tax relief for individual charitable giving. It’s a provision both important in its own right — and revealing of a larger philosophical difference between the parties when it comes to charity.
The latest “skinny” Senate bill would specifically have expanded the so-called “above-the-line” tax deduction included in the original CARES Act, which authorized a $300 deduction even for those who do not itemize their tax returns. The Senate bill proposed to double that amount for 2020 taxpayers, to $600 for individuals and $1,200 for those filing a joint return. The House bill included no such provision, or even an extension of a less-generous version included in the first COVID-19 relief bill.
This is much more than a technical difference about the tax code. The Democrats’ indifference implies a great deal: that it’s better for the federal government to capture increased tax revenues than to encourage the decentralized, individual support for a range of civil society organizations (including some addressing the pandemic) that defines charitable giving.
Advocates of low tax rates and a simplified tax code are not necessarily wrong to argue that the existing charitable deduction, which allows for up to 50% of adjusted gross income to be deducted, should not be necessary. That, however, would apply in a system of much lower tax rates that would leave households with more discretionary income. In the real world, the tax code encourages all sorts of dubious distortions. That’s not true of the $309 billion in individual charitable giving — which, according to Giving USA, goes predominantly to religious institutions, education, and social services.
That impressive figure masks the fact that the tax incentive for charitable giving does not apply to the vast majority of taxpayers, in part, because of the 2017 Tax Cuts and Jobs Act. In the nation that Alexis de Tocqueville observed to be widely philanthropic, charitable giving is at risk of becoming predominantly a behavior of the rich, thanks to the tax code.
This is not entirely a new trend. In 2009, the Williams College economist Jon Bakija noted that those earning more than $200,000 comprised just 2.6% of the population but accounted for more than 29% of charitable giving at the time. Since then, the tax reform law likely exaggerated that picture, simply because of its sharp increase in the standard deduction, from $6,500 to $12,000 for individuals and from $13,000 to $24,000 for married filers. As a result, according to the Tax Foundation, itemizers have fallen from about 31% to just 13.7% of taxpayers, including less than 10% among those whose earnings fall in the lower two-thirds of households.
The “above-the-line” deduction proposed by Republicans provides an incentive for all taxpayers, not just the wealthy, to give to charity. (Of course, wealthy people still have a much stronger incentive because their tax rate is so much higher and, thus, so is the value of their deduction.)
It is well worth reflecting on Democrats’ apparent indifference to an incentive for low-income households. In effect, liberals are asserting the dollars that nonaffluent taxpayers could direct to churches, food banks, or local educational organizations would be better spent by the federal government. Taxpayers, if they had the choice of an above-the-line deduction, would be free to agree. This would not coerce charitable giving, which, in contrast to other deductions, does not provide a direct benefit to the taxpayer. But he or she would have the choice: Send the money to Washington or help one’s local community — perhaps a cause that one cares about the most.
Not all Democrats oppose such a provision. Sen. Chris Coons of Delaware, who holds Joe Biden’s former seat, was one of three Democrats to cosponsor the bipartisan Universal Giving Pandemic Response Act. That did not, however, lead him to break ranks and support the Republican Senate bill.
This is not surprising, as Democrats, lately, have not been known to support policies that encourage philanthropy. Charitable giving was on the chopping block when the Obama administration proposed to raise the marginal tax rate to 35% — but cap the value of deductions (including the charitable one) at the lower rate of 27%. And liberal groups have recently made clear their antagonism toward the fastest-growing form of charitable giving, the donor-advised fund. The National Philanthropic Trust reports that contributions to donor-advised funds, which totaled $37.12 billion in 2018, increased by 86% over the previous five years.
These funds, sometimes referred to as “DAFs,” allow nonwealthy households to contribute charitable dollars to a privately managed account (one might consider it a charitable IRA) in high-earning years but disburse them later in life. This maximizes the value of their charitable deduction, and although these funds appreciate, they can still only be used for charitable giving. The left-leaning Institute for Policy Studies, along with the so-called “Patriotic Millionaires,” have pushed for higher and quicker payout rates for donor-advised funds, which would inevitably complicate their management and discourage their growth.
Whether one considers it indifference or implied animosity, Democrats, as of late, do not appear to value the power of philanthropy. This is unfortunate given the ability of nonprofit groups to respond more quickly and directly to needs than the government — something that has been made abundantly clear during the pandemic. If Congress cannot compromise to pass additional COVID-19 relief, an increased incentive for charitable giving like that in Sens. James Lankford’s and Coons’s bipartisan bill, would encourage people to take it upon themselves do something about the needs in their communities rather than wait on politicians to come to their senses.
Those who work for nonprofit organizations that rely on the charitable giving of others have, indeed, been heroes during this pandemic. Take one example: Invisible Hands (a group that was organized in a matter of hours by three, young 20-somethings as New York City faced the first wave of the pandemic) provides free contactless delivery of groceries, medicine, and other necessities to its communities’ most vulnerable people, especially those at high risk for contracting a serious case of COVID-19. Five months later, the group has amassed more than 10,000 volunteers and completed thousands of deliveries to those in need — amounting to more than $1 million in critical grocery items. It couldn’t do this amazing work without selfless volunteers and charitable donations.
But the Democrats’ so-called “HEROES Act" has no place for those who make this impressive nonprofit work possible. This omission was no coincidence. After all, it was Bernie Sanders, who, as mayor of Burlington, Vermont, said openly, “I don’t believe in charities.”
This piece originally appeared at the Washington Examiner
Photo by Massimo Giachetti/iStock