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October 01, 2007

How Charity Subsidizes The Rich

"I'm all in favor of supporting the arts and our universities," writes Robert Reich, "but let's face it: These aren't really charitable contributions. They're often investments in the lifestyles the wealthy already enjoy and want their children to have too. They're also investments in prestige -- especially if they result in the family name being engraved on the new wing of an art museum or symphony hall."

Agreed. The tax deductibility of charitable donations to private universities, the arts, and so forth are a bit of a scam. This year the Treasury will forgo $40 billion in tax revenue due to the deductibility of philanthropic donations. That makes sense when the money is going to feed the poor -- but studies show that only 10% of charitable donations go directly to the poor. And there's no reason the rest of us should be subsidizing an I-banker's desire to fund a named chair at his alma mater and, oh yeah, help his kid get into the school to boot.

Additionally, charity has become something of a lifestyle, with large donations buying you entrance into concerts, gala dinners, special exhibits, networking events (see Global Initiative, Clinton), and much else. In such cases, charitable donations are closer to purchasing tickets than selflessly and anonymously giving up private wealth for public ends. "Awhile ago," says Reich, "New York's Lincoln Center had a gala supported by the charitable contributions of hedge-fund industry leaders, some of whom take home $1 billion a year. I may be missing something, but this doesn't strike me as charity. Poor New Yorkers rarely attend concerts at Lincoln Center." And they shouldn't be subsidizing those who do.

"So here's a modest proposal," finishes Reich. "At a time when the number of needy continues to rise, when government doesn't have the money to do what's necessary for them and when America's very rich are richer than ever, we should revise the tax code: Focus the charitable deduction on real charities."

October 1, 2007 | Permalink


Or make changes to the system to reduce the need of charity towards the poor, generally by reducing the numbers of poor.

This would be accomplished, of course, through single-payer health care and a minimum wage that for a 40-hour work week is above the poverty line for a family of 4.

Posted by: Karmakin | Oct 1, 2007 9:27:49 AM

For once I agree (in part) with Mr Reich. Eliminate the deductibility of donations to PRIVATE universities and PRIVATE museums, etc. Continue to allow deductibility to public institutions to help subsidize public funding.

Posted by: El Viajero | Oct 1, 2007 9:39:45 AM

Not to throw a wrench in all this, but why should any charitable donations result in tax breaks?
I mean, if the government wants to encourage people to donate, well, then it should GO FLY A KITE. If, on the other hand, it wants poor people to EAT, then it should give them food. Arts? - fund the NEA. And so on.
Everything else is just whitewash. The only people who benefit from charitable donation deductions are the rich. And if the rich are truly virtuous, they'd still donate, regardless of the tax status of the donation. Anyone taking bets on that?
Now returning you to your regularly scheduled charade...

Posted by: Govt Skeptic | Oct 1, 2007 9:40:50 AM

Poor New Yorkers rarely attend concerts at Lincoln Center."

Maybe not, but almost poor grad students in NJ sometimes take the train in to do so (or attend similar cultural institutions). Haven't y'all heard of nosebleed seats? And student rush? You know ... those people up where you don't see them who are singing along with the show and there to enjoy themselves as opposed to see and be seen?

Posted by: DAS | Oct 1, 2007 9:47:58 AM

Well, there's something elegant about the way that the US tax code doesn't make any "value judgments" about the not-taxability of non-profits. If someone objects to the fact that some organization isn't taxed, I can just say, "well, it's a non-profit, just like any other. that you dislike it's mission is unimportant."

However, one of the reasons that people with a lot of money are more apt to donate money to these sort of "lifestyle" non-profits is because they feel that they can see the results more tangibly up-front. You write a check for millions of dolalrs, and the new building wing gets contructed. You endow a chair for a professor, and someone gets hired. You fund a scholarship, and someone gets that money. With more traditional charities, the results are harder to see. I worked with an organization that tutored promising students inthe inner city to guide them through the path onto college. Does it help? Who knows? Does it make someone more likely to go to and succeed in college than they would otherwise? They were still trying to measure that... and the nature of the work is that progress is extremely incremental. I can see how someone with non-profit donations to make, unless he or she has some personal interest in these sorts of programs, is going to spent his or her dollars in such a way in which
the results of the spending are easy to see.

Posted by: Tyro | Oct 1, 2007 9:55:32 AM

WaPo also has a decent piece of reporting today on a little non-profit that does standard intel consulting work for DoD and the CIA but is getting all the tax free perks. A different non-profit scam but in the same vein of using the designation to boost the income of fairly well off folks.


Posted by: DMA | Oct 1, 2007 10:04:34 AM

"you write a check for a million dollars and the new building gets constructed."

you mean, a building gets constructed with Your Name on it.
a blatant example of visible charity...
one of the most important rules of tzedakah (the giving of charity) is that it should be anonymous and not to bring self-aggrandisement.
one can often walk into religious buildings, and even the water faucets in the restrooms have little brass placards, "donated by the____________family.
everything you touch, has a placard on it.
....just as on special holidays, it is not the humble congregant in the last row who is called to the altar with the honor of reading from a holy book, it is the person who donated the money for the chandeliers in the social hall.

Posted by: jacqueline | Oct 1, 2007 10:20:53 AM

Y'know, I take your point, but to further defend Lincoln Center -- it includes the Metropolitan Opera, which just broadcast its opening night on a screen in Times Square, so I imagine a few poor NY'ers might have gotten a glimpse. It includes the NY Philharmonic, which puts on free concerts in the parks in NYC. It includes with NY City Opera, the whole point of which is to have a lower-priced opera company that more NY'ers can afford to see. Lincoln Center has free outdoor events in the plaza. Etc., etc.

I guess you could just take the attitude that the arts aren't high enough on the list of priorities to warrant this charitable giving, but I disagree. And I personally think Reich's attitude is pretty damn condescending. What, "poor people" don't benefit from a lively arts scene? I think a place like Lincoln Center improves this city, even for "poor people," and if it takes stroking some CEO's ego to get it, that's fine by me.

Posted by: Glenn | Oct 1, 2007 10:25:00 AM

I totally agree with Glenn. Art absolutely belongs on the list of things that should be deductible. If you buy someone a meal one day, you temporarily alleviated their hunger and showed them that there is someplace they can go for food. That's important. If you make art accessible, then you can show people that there are things in this world that are transcendent and beautiful and that they can experience them the same as anyone else. And if you do that, then you've given them something to live for, which will do more to get them out of hopelessness than any number of free meals. This is important too!

Posted by: HFS | Oct 1, 2007 10:41:20 AM

Add to this all of the political nonprofits -- for better or for worse. I like the idea that my tax dollars are subsidizing doctors without borders, but focus on the family I'm not so sure about...

If you revised the tax code to make charitable contributions non-deductible, you'd have to do something about the first amendment; otherwise the government would be smack in the middle of establishing religion (by deciding which religious organizations got a deduction and which didn't). Or you'd have to overturn centuries of jurisprudence establishing the religious exemption. Or you'd make no headway at all, because everybody would become a religion...

Posted by: paul | Oct 1, 2007 11:21:10 AM

I'd address it on the other end.

I'd say that a "non-profit" must spend 5%+inflation of it's money, yearly, on its declared purpose. Fundraising, administration, etc don't count.

Posted by: SamChevre | Oct 1, 2007 12:10:15 PM

I can certainly see Mr. Reich's point regarding a well funded, popular arts program like you can find in NYC. My little hometown local symphony struggles every year, though, and I am happy to help them out and I only get a tiny little tax break for it. I tend to think that the symphony, along with a few art galleries and a playhouse a few other things that struggle to hang on in our little city, go a long way towards making this town a better place to live. And these organizations do give back. The free concerts given at the local elementary schools are virtually the only music history exposure some of those kids get anymore, for instance. Most events we go to are well attended, but it simply costs alot of money to keep these things afloat. Plus, everyone wants to keep the ticket prices low.

Posted by: chowchowchow | Oct 1, 2007 12:30:28 PM

Well in addition to Glenn's point on art generally this would simply kill any kind of public fine art museum. That is while some people might still be inspired to donate that Cezanne, without the tax break I would expect the flow of donations to slow to a trickle. And lots of these museums have days with free or reduced admission. I am not sure I want a kind of America where only rich people get to see Picasso.

Moreover this kind of proposal simply slaps around local historical preservation efforts and things like community theatre.

Not everything is Manhatten. I kind of like Reich but sometimes he doesn't seem to actually think things through.

Posted by: Bruce Webb | Oct 1, 2007 12:37:02 PM

I know the one charitable organization that everyone here likes - the federal government. (Of course, charitable donations aren't normally given because of the threat of prison, fines, or the barrel of a gun.)

And who the heck cares about the motivations of the person giving to a charitable donation? If I give money to PBS, who cares if it's because I want to be recognized in the community or just because I like Big Bird?

And you can't tell me that NPR is a targeted towards helping the poor.

And the claim that Lincoln Center doesn't help in the community is erroneous as well. Check out the Lincoln Center Institute.

My local symphony provides a ton of free concerts.

Posted by: stwendeler | Oct 1, 2007 12:37:26 PM

Not everything is Manhatten. I kind of like Reich but sometimes he doesn't seem to actually think things through.

Understatement of the day...

and people give to charity not simply for the tax deduction - it's not the motivating factor, just a benefit of being charitable.

I give to a local organization that supports families of fallen police & firefighters. If that donation were taxed, I'd probably still give - but I wouldn't give as much or as often, so your point that donations would likely dry up is accurate.

Posted by: stwendeler | Oct 1, 2007 12:41:35 PM

"Focus the charitable deduction on real charities"

We've just got this one going on in the UK as well. (Although our system is very different). The definition of "real charity" is expected to be changed so that private schools do not qualify. It's not so much about donations (because our system is so very different) more about the exemption from sales taxes (VAT) that charities charge upon their services.

It's also nothing at all to do with raising any significant sums of money: 80 million pounds perhaps a year, (0.000016 % of the annual tax take). It's that the political party currently in power absolutely hates the entire concept of private schooling.

And that's where the real problem will be. Defining "real charity".

Posted by: Tim Worstall | Oct 1, 2007 1:08:23 PM

The "modest proposal" is unworkable because it is impossible to clearly differentiate "real charity" (those for the poor) from the "unreal" ones. I also think that the tax deductibility isn't really a problem. So the fisc is losing 40 bilion a year? Well, much of that money is well spent, if not by providing "real charity", then by creating lasting value for society. And I concur with Glen that cultural institutions do benefit all of society, not only the rich. And to the extent that they benefit the rich more than the poor, that is true of many publicly funded institutions as well. Heck, this is a class society. Of course, the wealthy have more power than the poor to impose their own preferences on public spending. You can't solve this problem by arguing against all - direct or indirect - public funding of libraries, museums, universities etc. Even the publicly funded state universities serve the middle class more than the poor. Revoking the tax status of private universities won't solve the underlying problem.

What concerns me is not so much the tax status but the cultural status of American "philanthropy". Americans, both rich and poor, are generally full of admiration for rich donors. Conservatives like bragging about American "generosity", that is so much superior to the European welfare state. Just check the recent book "Who Really Cares" by Arthur Brook. European tax-funded generosity doesn't count since it is "involuntary". In European cities, you will find libraries, museums and universities that are not named after rich donors. They are called City Library, City Theater etc. and they provide cultural services to all segments of society, although the middle class will still be overrepresented - they are class societies just as well.

What is bothering in the America debate on these issues is that there is so little recognition for the collective effort. The billionaire who gives a few millions to build a library named after him is a shining hero, a true model of American virtue. The community that decides democratically to build a library, and to fund it collectively by paying taxes, gets dissed as Big Government wasting the tax payers' money. Rising inequality in America will likely spur further "charity" by the rich - more proof of America's economic, and moral (which in the protestant mind-set is pretty much the same), "superiority".

Posted by: piglet | Oct 1, 2007 1:40:41 PM

What concerns me is not so much the tax status but the cultural status of American "philanthropy". Americans, both rich and poor, are generally full of admiration for rich donors. Conservatives like bragging about American "generosity", that is so much superior to the European welfare state. Just check the recent book "Who Really Cares" by Arthur Brook. European tax-funded generosity doesn't count since it is "involuntary".

scare quotes on involuntary not needed - they aren't voluntary by default.

It's a fact that increased taxes correlates to decreased charitable donations. If people think that their tax money is being used for programs to help the poor, they are less likely to donate themselves - since they "gave at the office." And just because a building is named after a wealthy benefactor and not the City Museum, etc doesn't mean it's inaccessible or non-beneficial to the poor.

The community that decides democratically to build a library, and to fund it collectively by paying taxes, gets dissed as Big Government wasting the tax payers' money.

No, that would be fine... a local community deciding to raise local taxes to build a library happens all the time in America. It's money raised locally to benefit local residents. I would say that I'd prefer it if the money was raised through charitable donations or through municipal bonds (which also have a favorable tax status), but I'll leave the decisions on how to best finance the project to the local leaders and their ability to lobby their constituents.

What is viewed as "Big Government waste" is someone in Alabama paying taxes which end up going to build a library in New York City or some other location.

The definition of "the community" is very important in your example.

Posted by: stwendeler | Oct 1, 2007 2:21:32 PM

Totally agree with this idea. I remember an article posted here a while ago about the new tycoons and their modern-day gospel of wealth, wherein capital gains and high income taxes were pure evil to them but they all trumpeted (in lieu of those things) the merits of charity. Well the problem is charity is never a replacement for government funded social programs that need tax dollars, but moreso its certainly not a replacement when its being used to build up the playgrounds of the wealthy like Carneige Hall and Opera Houses.

In many ways, I think thats a more important point. People always excuse grotesque wealth if those who have it are giving it to charity. The problem is that with the definitions of charity as they currently are, its quite possible that the grotesquely wealthy are only giving charitble contributions that benefit the grotesquely wealthy (or at least fairly wealthy.) Its one thing if Joe Rich gives large portions of his money towards providing college scholarships for the underpriveleged but if he's giving it to his ivy league alma mater then its the equivalent of giving his niece a big chunk of cash at her bat mitzvah. The perception that they are "charitable" is silly and falicious and should be another notch in the argument that there is NO replacement for government funded social programs.

Posted by: Matt | Oct 1, 2007 3:19:23 PM

Why not make it simple.

Everybody over 18 and under 70 gets one yearly deduction 75% of Median income so at 48, 201.00 that's 36,150.00 of income that is tax free, no withholding until that number is met. Everybody gets the same deduction, want to spend it symphonies...be my guests...the poor...better yet...need a house...spend it on that.

Stop having government tell people how to spend their money!!!

But if we did that, every right wring organization would be up in arms just as the right wring commenter above are. Hypocrites!

The real technical problem with above is small businesses deductions and the perfectly legal scams they spawn.

Posted by: S Brennan | Oct 1, 2007 3:24:03 PM

"What is viewed as "Big Government waste" is someone in Alabama paying taxes which end up going to build a library in New York City or some other location."

Is this intended to be a precise example or just some random idea. Either way its misleading because, of course, New York City contributes far greater amounts to tax coffers than Alabama does, with Alabama getting far greater remittances from the government.

But on top of that, whats wrond with Alabama paying for a libray in NYC if thats where a library is needed? Whats wrong with taxes being collected in certain places being applied to where they are most needed? Prioritization of funds is the basis of any effective social program in terms of what is bought but also where funds are utilized. Theres nothing wasteful about that.

Posted by: Matt | Oct 1, 2007 3:30:07 PM

The question to answer in discussing governmental support for the arts, either through direct subsidy or through tax-breaks for charitable contributions, is simple: is there value to society in protecting some sectors of the culture from the sharpest edges of market capitalism. A symphony orchestra can not survive on ticket sales alone, and in the absense of some sort of revenue outside of "earned income" almost all of them would fold. Is there value to society in having art that doesn't have to support itself? I think so, but it's a personal opinion. If you happen to agree with me, then we have two options -- direct governmental subsidy or tax deductions of contributions. Direct subsidy on the scale that would be required is a pipe dream at this point (and has some other problems as well), but charitable giving is doing okay.

There is a valid point to be made about forgone tax revenue subsidising the leisure activities of the wealthy, but it's also important to note that most of the people who buy tickets to arts events today wouldn't be able to afford ticket prices that accurately relfected the costs of the events. To a large extent the rich are subsidising the leisure activities of the middle-class, so the system IS progressively redistributive.

Furthermore, the amount of revenue forgone by the government in tax deductions is only a fraction of the amount of money trasfered from private hands into public hands. The top tax bracket in the US is 35%, so for every dollar given to charity by a person making more than $350K per year, the US government forgoes 35 cents, and charities get that 35 cents plus 65 cents. If the government took that 35 cents, we need to ask how much of the remaining 65 cents would simply stay in the pocket of the donor.

I don't disagree with Reich and Ezra as much as this post might make it sound -- they have some very important points -- but these are critical considerations for the debate.

To me the most important argument against tax deductions is that they allow rich people to partially opt their tax dollars out of government funding priorities and into their own. Even if you divert charity money out of the arts and academic sector into "real charities" you're not going to get much more money for un-sexy causes. Cancer and Male Pattern Baldness research money will go through the roof, and poverty programs still won't see much of it. Some things are best funded through taxation and some are best funded through philanthropy.

Posted by: Galen | Oct 1, 2007 3:49:33 PM

Is this intended to be a precise example or just some random idea

My point wasn't the specific locations, but the fact that people who would not receive the benefit of the spending are forced to contribute the money.

Make it upstate New York vs New York City... or Fed taxes of New York City residents being used to build a bridge for 50 people in Alaska.

Prioritization of funds is the basis of any effective social program in terms of what is bought but also where funds are utilized. Theres nothing wasteful about that.

And who prioritizes the funds? Have you ever heard of tyranny of the majority?

Galen makes some good points... as I mentioned earlier, I could make a strong argument that charitable contributions to NPR are not "real charity," since NPR isn't exactly targeted towards the poor.

However, at the end of the day, I guess what Ezra and everyone here is saying is that you HATE the fact that people are able to decide where they get to spend their money - and, given the option, would tax the money regardless of how it's spent. Can't let a thin dime go to a charitable cause without wanting the Feds to get their 3.5 cents.

pathetic, really.

And, it's not subsidizing the rich - since it's the people's money to begin with.

Posted by: stwendeler | Oct 1, 2007 4:13:21 PM

stwendeler is a typical example of what I am talking about. "Taxes are involuntary by default" - come on. Europeans are paying higher taxes (well, depending on the country of course) because that is what they have decided collectively, by democratic elections and votes. It is immaterial whether this happens on the local, regional, national or even continental level. There will always be some who disagree, and who end up paying for something that they didn't personally approve of. That's democracy, and that doesn't invalidate my argument which is that collective action has an unjustly negative reputation in the US. People like Arthur Brooks contend that a rich person donating a bit of his/her wealth to be commemorated on a plaque is morally superior to the regular person voting for funding some community infrastructure and also being ready to pay his/her share in taxes, however small (in comparison to the rich donor's donation). This morality appears upside down to me.

a local community deciding to raise local taxes to build a library happens all the time in America.

I happen to live in a city in which the library, the performing arts center and important parts of the university have all been donated by rich local donors. I am noting the difference to Europe, where this rarely happens. It is true that Europeans are less inclined to donate to libraries and universities, because they feel that these institutions should be a collective responsibility, funded by the whole community, not just by donors. And they are right. I am certainly glad that we have this splendid library and it does serve our community but I am also concerned about cities that are not so lucky to have rich donors. Those other cities will have to raise taxes to have a library, which means they'll be worse off in competition with cities like mine. In short, if community infrastructure is left to private charity, what happens is that existing inequality will be reinforced. Europeans tend to be offended by the idea of letting rich donors, and the local tax base, decide whether their children will benefit from a well-equipped library, or well-equipped schools for that matter. Many countries therefore have a commitment of mitigating inequality by transferring some resources from wealthier to poorer communities. This is what you are dismissing as "Big government". Only your New York - Alabama example is upside down.

Posted by: piglet | Oct 1, 2007 4:14:02 PM

And who prioritizes the funds? Have you ever heard of tyranny of the majority?

That is an issue on the local as well as on the national level. What is your alternative? Letting everybody decide themselves how much taxes they pay, and for what causes? Great. I would be happy not to fund any wars any more. On the other hand this would be a society in which the rich get to decide everything (since you can't implement any policy without funding) without even a semblance of democratic oversight. We might as well abolish universal suffrage. Before the US and French revolutions, it was custom that ownly property owners could vote and hold office. Maybe we should go back to that historic precedent?

Posted by: piglet | Oct 1, 2007 4:23:47 PM

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