Making the World Safe for Philanthropy: The Wartime Origins and Peacetime Development of the Tax Deduction for Charitable Giving

Making the World Safe for Philanthropy The Wartime Origins and Peacetime Development of the Tax Deduction for Charitable Giving Joseph J. Thorndike April 2013 Copyright © April 2013. The Urban Institute. Permission is granted for reproduction of this file, with attribution to the Urban Institute. This publication is part of the Urban Institute’s Tax Policy and Charities project. The purpose of this project is to analyze the many interactions between the tax system and the charitable sector, with special emphasis on the ongoing fiscal debates at both the federal and state levels. For further information and related publications, see our web site at http://www.urban.org/taxandcharities. The Tax Policy and Charities project is funded by the Bill and Melinda Gates Foundation, the Charles Stewart Mott Foundation, the Wasie Foundation, the Rasmuson Foundation, and other donors through June 2014. The findings and conclusions contained in the publications posted here are those of the authors and do not necessarily reflect positions or policies of either foundation. The Urban Institute is a nonprofit, nonpartisan policy research and educational organization that examines the social, economic, and governance problems facing the nation. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. Contents 1917 6 1944 9 1981–86 12 Conclusion 17 Notes 19 4 Tax Policy and Charities Making the World Safe for Philanthropy As Washington wrestles with its long-term fiscal problems—and its near-term political gridlock—the tax deduction for charitable giving has been getting some special attention.1 As one of the nation’s most costly tax expenditures—and its third most expensive itemized deduction—the deduction is an obvious target for reform.2 Add to this its less-than-progressive incidence, and you open the door to meaningful change.3 Or maybe you don’t. Proposals to abolish the deduction are not unknown,4 but neither are they popular. As Gene Sperling, director of President Obama’s National Economic Council, has observed, It is hard to design a better way to unite the most-well off Americans and those representing the poorest Americans, non-profits, churches, universities and hospitals, against a single idea than proposing to completely eliminate the charitable deduction.5 But if scrapping the deduction seems unlikely, scaling it back seems plausible. In recent years, plans to curb its cost have been floated by the National Commission on Fiscal Responsibility and Reform (a.k.a. the Bowles-Simpson commission),6 the Domenici-Rivlin Debt Reduction Task Force,7 and the White House itself, through a series of annual budget proposals.8 These plans differ in detail and approach, but all would curb the current deduction in the name of fiscal responsibility. Not surprisingly, representatives of the charitable sector have vigorously opposed these plans. “We are fully committed to helping lawmakers understand the unique nature of the charitable deduction—and that it’s not a loophole, but a lifeline,” explained Sandra Swirski, executive director of the Alliance for Charitable Reform, in a typical statement of opposition.9 As a whole, the nonprofit sector has mounted a broad campaign to blunt reform efforts and protect the deduction in its existing form (or something very close to it). Lobbyists for the nonprofit sector have found allies across the ideological spectrum, with both Democrats and Republicans rallying to their cause. But support for the deduction has been particularly strong among conservatives, many of whom tend to view the issue in starkly ideological terms. According to these defenders of the deduction, efforts to curb the provision are an integral part of the liberal agenda. Evaluating The Charitable Deduction And Proposed Reforms 5 “Progressives enjoy herding people to the door step of governmental assistance,” argued a writer for the American Thinker recently. “Food stamps and disability payments and the entire cornucopia that is federal assistance are their pet programs. Charities are an obstruction to a full and total reliance on government.10 Howard Rich, a libertarian activist, has made a similar case, adding in a dose of American Exceptionalism. As a people, he argued, Americans are uniquely benevolent. “This is why it is so disturbing to see the Obama administration continue to attack this spirit of generosity—and the nonprofit economy it supports—as part of an effort to expand the public-sector welfare state.”11 Such arguments—in favor of the deduction and against proposals for substantial reform—have deep roots in American polit