When Donald Regan announced the Treasury Department's proposal to change the tax laws as they relate to charitable contributions, my organization, Independent Sector, engaged Charles T. Clotfelter, vice provost of Duke University and author of "Federal Tax Policy and Charitable Giving," to do an analysis. Dr. Clotfelter now predicts that the proposal would result in a reduction of gifts to charity of $11.8 billion a year. This would cut giving by 20 percent at the very time the Reagan administration is calling on nonprofit organizations to carry a far larger share of services to people.
In a separate analysis prepared for the Association of American Universitites, Prof. Larry B. Lindsey of Harvard University and the National Bureau of Economic Research predicts that giving would decline even more. He adds, "even assuming an annual economic growth rate over five years of 6.25 percent, which is more than twice that currently forecast by the Congressional Budget Office and more than 50 percent higher than the Administration's forecasts, the economic growth resulting from Treasury's proposals could be expected to make up only about one-third of the giving lost as a result of the provisions affecting charitable giving."
Though the relationship of taxes and giving is important, as illustrated by the Clotfelter and Lindsey studies, people do not give to the causes of their choice because of tax considerations. The larger motivations relate to helping others and improving communities. However, the availability of the deduction does influence the size of enough gifts to represent an overall increase in giving of 31 percent, beyond what would be contributed if there were no deduction. Also, giving does not represent any advantage to the giver. Contributions still represent a subtraction from what could be spent on other things. The deduction for contributions is the only deduction that provides no tangible benefit to the taxpayer. These are not dollars consumed or saved. They are voluntarily contributed for the public good.
Most of the current proposals for tax simplification and reform would reduce the tax rates that determine how much each citizen pays. In turn, each lowering of the rates means that some tax incentive for the size of some gifts is removed. Even with those consequences squarely before us, we would be silly to argue for higher tax rates because they result in higher giving. At the same time, given this unintended negative consequence of tax reform, there is all the more reason not to undercut giving further with additional disincentives.
The Treasury plan recommends these three intended undercuttings:
1)Contributions could only be deducted to the extent they exceed 2 percent of the taxpayers adjusted gross income. At present, there is no minimum base.
2)Deductions for gifts of appreciated property would be limited to actual costs plus a factor for inflation or to actual market value, whichever is less. Currently the market value can be deducted.
3)The charitable deduction for non- itemizers would be allowed to expire as currently scheduled. Since 1982, taxpyers who do not otherwise itemize their deductions have been allowed to deduct part of their contributions up to a limit. This was passed by Congress to help spread the base of giving and to increase total contributions.
By Treasury's own figures, its proposal, when fully implemented, would remove $9.8 billion a year or 17 percent, from the whole range of services provided by voluntary agencies. Clotfelter puts the figure at $11.8 billion and Lindsey even higher. Our experience tells us the two independent economists are probably closer to the mark. But even if one were to adopt Treasury's lower estimate, $9.8 billion still goes an awfully long way in this nonprofit sector. For example, that is five times as much as has been contributed to all the United Way campaigns throughout the country this year.
The recommended changes contradict the basic purpose of the deduction that was adopted in 1971 to foster private giving for public purposes. The deduction of charitable gifts has provided a significant incentive for increased giving. Even more important, it has served to remind all of us that it is the philosophy and policy of the people and our government to foster private giving for the public good. These direct and indirect encouragements have helped to sustain the enormous outpouring of citizen participation that is among the country's most important and distinctive characteristics. Americans do not like to leave the pursuit of public purpose to government alone.
We are not experts on tax policy, but we do know what nonprofit endeavor has meant and continues to mean to the kind of society we are. Whatever occurs as the result of current efforts related to tax reform must not intentionally reduce governmental encouragement of voluntary endeavor. Any such move would negate the larger public policy consideration, which, from the start, has been to foster the vast participation and diversity that are so much a part of America's uniqueness.
The Treasury Department's recommendations contradict totally this administration's call for volunteers and voluntary organizations to play a larger role in helping people deal with human problems, community needs and national aspirations.