Don’t Foot the Bill

Imagine you are a successful alum several decades out of Harvard or a similarly prestigious institution. You have a few million dollars that you want to give to charity. Where would your donation go?

For a high proportion of today’s ultra-rich, the answer to that question is one’s alma mater, along with cultural institutions like museums, symphonies, or operas. It’s not hard to see why—in addition to altruistic motives, the rich reap benefits from giving to these types of organizations. For instance, the benefits of being a major donor to a university run the gamut from increasing the admissions odds of one’s grandchildren to getting a building named after oneself.

An increasing number of pundits, however, believe that universities are not fully deserving of such donations, especially since these donations are tax deductible. For instance, in an op-ed in the Los Angeles Times, former Secretary of Labor Robert B. Reich argued that such donations are not to “real charities” because they do not directly serve the poor. Consequently, he argued, donors should not get a full tax deduction.

This criticism, however, is a red herring for the real problem: that the government unjustly subsidizes charitable contributions by the rich. This is because the federal government allows donors to deduct charitable contributions from their taxable income. The rich, who face a 35 percent federal tax on each additional dollar, essentially get a 35 cent tax rebate on every dollar they give to charity. The poor, who face a much lower tax rate, get a much lower rebate for giving to charity. Although the amount that one can deduct is capped, this translates into the government paying for donations made by the rich.

This system makes a mockery of the notion of fairness. If anything, it should be easier for a poorer person to give to charity, not harder.

The charitable deduction system also leads to the problem of under-donation to charities that actually serve the poor that Reich and others have identified. Research has shown that wealthy people are four times more likely to donate to education or the arts—causes that they benefit from—than low-income donors, who are more likely to give to causes that aid the less fortunate. Organizations like the Bill and Melinda Gates Foundation are the exception, not the rule in high-level giving.

By subsidizing donations by the wealthy, the federal tax system magnifies this effect and robs the government of money that it could use to further the greater public good. Rather than trying to manage where the rich give their money by determining which charities are “truly deserving” and which should not merit tax deductible gifts, the government should simply cut its subsidy to donations by the rich and use the additional tax revenue to fund charities that directly help the poor. After all, non-profit organizations in low income neighborhoods are primarily sustained by government aid, not philanthropy. The good that could be done if all of the subsidies to donations by the rich were transferred to such organizations is staggering.

It is not unreasonable for the rich to give to institutions from which they will benefit, like universities and the arts. What is unreasonable is for the government to foot the bill for those donations. Consequently, the government should not change its policy toward charitable contributions to specific causes; it should change its policy towards giving by the rich in general.