On his 19th century travels through the United States, the French philosopher Alexis de Tocqueville marveled at the American experience of a diversity of civic organizations formed through gifts of time and money. "Wherever at the head of some new undertaking you see the government in France, or a man of rank in England," he observed, "in the United States you will be sure to find an association."
Nearly two centuries later, the American tradition of philanthropic giving to organizations continues to be a model for the world. The United States leads globally in charitable donations, and there are more nonprofit groups here than in any other country. These organizations, fueled by philanthropy, are among the first responders to the wrenching consequences of natural disasters and provide innovative and humane assistance to the poor. Many of our great colleges and universities were built through philanthropy; these institutions not only educate our next generation of citizens but are the birthplace of pioneering discoveries that have improved health and produced countless jobs for U.S. citizens.
But now, these organizations face a dire threat. Since 1917, our charities have been nurtured by a tax deduction for charitable giving. Now, in search of deficit reduction, policymakers are considering proposals that would roll back that deduction. One idea has been to limit the total amount of all deductions at $17,000 or some other dollar amount. Others have proposed capping the value of the deductions at 28 percent.
These proposals would have a devastating effect on the ability of charitable organizations to achieve their missions. People give because they care. But as with much of life, financial incentives can also play a significant role in the decision. It is no coincidence that more than 20 percent of annual online charitable donations last year were made on Dec. 30 and 31 — or that those countries with some of most generous tax deductions, such as the United States and the United Kingdom, also happen to have among the highest rates of giving as a percentage of gross domestic product.
Recent studies estimate that a 28 percent cap on the value of deductions would lead to a reduction in giving of anywhere from $1.7 billion to $5.6 billion each year. As Brian Gallagher, president and CEO of United Way Worldwide, testified at a Senate hearing last year, that is more than the total amount in donations each year to the Red Cross, Goodwill, YMCA, Habitat for Humanity, Boys and Girls Clubs, Catholic Charities and American Cancer Society combined. It is also more than the top 10 college and university recipients of donations garnered in private support last year.
Nonprofit organizations are already under greater strain than at any point in recent memory. The federal fiscal crisis is forcing governments to slash their funding for social services, universities and charitable organizations. The economic downturn has increased the need of millions for assistance with health care, housing assistance, and education. And the same downturn is making it harder for Americans to give to the nonprofit organizations that provide their services: Now is not the time to discourage giving even further.
The genius of the charitable deduction is that it encourages investment in activities that serve the public but that the government would be hard pressed to do on its own. It seeks to promote private conduct through citizen choice, a cost-effective solution that avoids the problems that can emerge from the government's selection of winners and losers.
Some suggest that the charitable deduction primarily benefits the wealthy. In fact, philanthropy reduces disparities across populations, helps the needy and the dispossessed, and provides education to those who could not afford it themselves. Others have hinted that the charitable deduction is simply a tax "loophole" that should be closed as part of tax reform. In truth, the deduction is a deliberate, nearly century-old component of an established ecosystem that nourishes institutions that improve the well-being of millions.
The nation needs to take serious action to address its fiscal future. We should, however, resist the temptation to balance the budget on the backs of our nonprofit organizations and those they serve.
Phillip N. Baldwin is the chairman of the U.S. Board of Trustees of United Way. Ronald J. Daniels is the president of the Johns Hopkins University. His email is email@example.com.