Linking gifts to deductions is a taxing question


AS THE year winds down, many people are making last-minute decisions about charitable gift giving.

One question that perennially pops up is whether or not tax concerns affect such giving.

In the past 25 years, 11 major tax law changes have created a mind-numbing 9,455 Internal Revenue Service tax code revisions. Despite the 1997 tax overhaul, we already have proposals before Congress for new changes. Some of these proposals could have a major impact on our nation's charities and, by extension, on the quality of life in our communities. And more fundamental tax-reform plans proposed during the 1996 elections, such as a flat tax and a national sales tax, are waiting in the wings for the next presidential election.

Price-sensitive giving

Several academic studies have shown that charitable giving is price sensitive. A taxpayer in the 28-percent bracket only ends up paying 72 cents on a $1 gift. While a flat 17-percent tax would mean 11 percent more income in a taxpayer's pocket, it would also mean elimination of the charitable deduction. That $1 gift would then cost a buck, or 33 percent more.

While conservatives claim that increased income in the taxpayer's pocket will boost charitable giving, history tells a very different story. In 1980, for example, top tax rates were at a stratospheric 70 percent. In that year, taxpayers with $1 million or more in annual income gave an average of $207,000 to charity. Then, in 1993, top rates dropped to 39.7 percent and charitable giving by the upper-income crowd plummeted to $109,000, a 47-percent drop that was mirrored by every income group above $100,000.

Middle-income Americans are also influenced by tax policy. Those who itemize their deductions -- irrespective of income level -- give as a percentage of income, three times as much to charities as those who don't itemize. In fact, a 1997 study by Price-Waterhouse estimates that the $104 billion that people who itemize gave to charity in 1996 would have been $33 billion less had the deduction not been in place.

According to Lester Salamon, director of the Johns Hopkins Institute for Policy Studies, and a leading expert on the nonprofit sector, only 18 percent of the average nonprofit's operating revenues comes from private donations. But that money is critical because it is often unrestricted, allowing the organization to spend it on whatever the board of directors considers a priority. So, the prospect of losing more private revenues from changes in tax policy is daunting, to say the least.

If Americans lose deductions If Americans lose deductions for charitable giving, those institutions that will be hurt most are cultural institutions like museums and symphonies.

for charitable giving, those institutions that will be hurt most are cultural institutions like museums and symphonies since they depend on wealthy, educated donors for their huge capital and equipment needs, Mr. Salamon said.

Charles Clotfelter, a Duke University economist, has shown that upper-income donors are especially sensitive when the cost of giving a charitable gift rises.

While tax-reform proposals "do not appear to have nonprofit organizations as their intended targets, like bystanders at a gunfight, nonprofits have a good chance of being hit," Mr. Clotfelter said in a recent article.

Mr. Clotfelter's research shows that tax proposals that make no provisions for charitable deductions reduce giving incentives for wealthy individuals.

Taxes and charitable giving have become as complex as our politics. That, in turn, produces some ironic political theater.

Our tax code is based on the principle that a taxpayer should not be taxed on income that is given to benefit society. Conservative proponents of flat taxes ironically avoid what is known as the pluralism debate. Voluntary giving means individuals -- not government agencies -- decide which cultural, social service, educational or environmental causes to support. On the surface, that would appear to be consistent with a conservative agenda. But that position has taken a back seat to the more pragmatic and short-term concerns of deficit reduction and revenue generation. Cutting taxes makes an effective sound bite. Honestly explaining the ramifications of those cuts could be political suicide.

So, forget those dusty academic and political debates. Plain and simple: Does tax policy stimulate giving by the wealthy?

Author James Michener provided a real-life answer to that question last year when he donated some valuable Japanese prints to a small museum in Hawaii. Throughout his life, Michener quietly gave away more than $117 million, nearly all of his net worth, to charity.

Michener's charitable inclinations were driven by his Quaker beliefs and his impoverished roots. Still, he was influenced by tax policies.

Fair-market value

He had considered donating the Japanese prints to the museum for years, but he didn't do it until Congress reinstated a law permitting donors to deduct the full fair-market value for gifts of appreciated art.

"I know damn well I would not have done it until they did pass that law," Michener told an interviewer shortly before his death in October.

Lester A. Picker is a free-lance journalist.

Pub Date: 12/17/97

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