Charity Gets No Respect

Posted: Mar 09, 2014 12:01 AM

There is a common saying on Capitol Hill that those who do not come to the table will become the lunch. This refers to those who fail to hire sufficiently well connected lobbyists or make large campaign contributions. Even those who do come to the table may get carved up. When President Obama called the parties making money from medicine into the White House to discuss what would become of Obamacare, most of the special interests tried to make a deal. With the Democrats controlling Congress and the White House, they knew that defiance would likely backfire.

The major insurance companies were not sure, and bought a few attack ads, but they were immediately threatened, and got in line. The only parties that did not “buy in” were the medical equipment manufacturers, and as a result the bill included a major tax increase on them, a tax increase big enough to wipe out the entire profit of some of them.

A group that does come to the table, but lacks much clout, is the nonprofit sector. There are some exceptions. Planned Parenthood is effective in Washington and receives federal funding, despite its controversial abortion services. Between 2003–2008, the organization received more than $2 billion in federal funds, of which the Government Accounting Office could only account for $657 million. But in general the nonprofit sector is not seen as a lobbying powerhouse, if only because charities cannot legally make campaign contributions or participate in elections.

This may be why President Obama on several occasions after his election proposed to eliminate charitable gift tax deductions for high earners and why, toward the end of the 2012 presidential election and shortly thereafter, Mitt Romney and other Republicans appeared to join him. The Republicans were vague. But they spoke of preventing income tax rate increases by removing deductions, and the charitable deduction was one of the deductions on the chopping block.

Critics of this assault on charitable deductions for high earners noted that Presidents Bush and Obama had chosen to bail out auto companies and Wall Street. Why tear down the whole charitable sector? That sector represented about 11% of the economy. It employed 13.5 million people, about 10% of the workforce.

Did the president consider charitable work, most of it done at lower wages and benefits than found in government or business, less valuable? Or was it that charity workers, unlike auto workers, were not concentrated in presidential swing states? President Obama said about his “Jobs Bill” in 2011: “These aren’t games we are playing here. Folks are out of work.”394 Well “folks” were out of work in the charitable sector too, yet ending the charitable deduction was part of how the president said he would pay for the Jobs Bill.

President Obama’s proposal to curtail the ability of single people with incomes over $200,000 or families with incomes over $250,000 to take a tax deduction on charitable gifts was on top of another reduction (the “Pease limitation”) that was already scheduled to come back with the end of the Bush tax cuts. He justified this in 2009 by saying, “I think [this] is a realistic way for us to raise some revenue from people who have benefited enormously over the last several years.”395 But that argument did not make any sense. Taking away the charitable deduction does not penalize the rich; it penalizes charities and the people being served by the charities. If the rich do not give, they end up with more money, not less. They do not suffer at all.

Obama’s budget director at the time, Peter Orszag, seemed to acknowledge this—that it was the charities, not the big donors, who would suffer under this proposal —when he said that charities should be willing to make this sacrifice in return for more people getting health insurance under the Patient Protection and Affordable Care Act (“Obamacare”). But this didn’t make any sense either. First, yanking the charitable tax deduction was not part of the president’s plan to finance broader healthcare. Second, reducing the deduction actually makes it harder to cover more people.

This last point only requires a moment’s thought. As we have already noted in an earlier chapter, if you want to cover more people, you need more doctors and nurses and clinics. In economic terms, if you increase demand, you should increase supply. Otherwise, people with the new health coverage still won’t be able to see a doctor or have to wait for weeks and weeks, and prices will likely soar.

This is not an abstract idea. It is has already happened in Massachusetts under Romneycare. Following implementation, newly covered people could not find a doctor, and prices were rising so rapidly that the legislature passed a price control system (even though price controls almost always fail). So if you need more healthcare supply nationally, how does it help to take a hatchet to nonprofit healthcare providers? In this context, it is important to know that many of the healthcare providers in the US are nonprofit. This includes 62% of hospitals, 30% of nursing homes, and all of the healthcare organizations (Mayo Clinic, Cleveland Clinic) that President Obama has publicly praised as role models.

The president also said, “There is very little evidence that . . . [cutting the charitable deduction] has a significant impact on charitable giving.” In fact, the evidence says the opposite, that for every 1% reduction in the deduction, gifts from wealthy people fall 1%.397 That kind of drop in charitable giving would be devastating for nonprofits. As David Harris, executive director of the American Jewish Committee, wrote to the president, “Most nonprofits derive 70 to 80 percent of their donations from a small proportion of their donors who are major givers. This proposal will deal a major blow.”

Moreover, “taxing” major donors’ gifts would not even produce that much revenue for the government, only an estimated $54 billion a year, not much compared to $300 billion in tax subsidies for health insurance or an overall budget deficit of $1.2 trillion. And charities would be expected to lose at least $54 billion and possibly much more. Will we really make America better by taking a dollar from charities and giving it to government?

President Obama added that he does not think it is fair that someone in the 35% tax bracket gets a 35% charitable deduction while someone in the 28% tax bracket gets a 28% deduction. Of course, the employer tax deduction for health insurance works the same way (the higher your income, the bigger deduction you get), and it involves much more money. The president did nothing to change this in his healthcare legislation because unions did not want it changed.

Also, if fairness is so important, why was the Affordable Care Act set up so that families at the identical income level receive government insurance subsidies that vary by $10,000 or even as much as $20,000? That did not seem very fair.

Furthermore, there is an easy fix to put everyone’s tax treatment for charitable giving on the exact same footing. Independent Sector, representing nonprofits as a whole, has proposed that “charitable contributions should not be included in an individual’s adjusted gross income (subject to tax).”401 What would be even better: reduce tax dollar for dollar with gifts, which would treat everyone alike and produce a torrent of income for charities. If government chose not to go that far, it could at least provide a tax credit for charities that directly help the needy.

President Obama had seemed to be praising charities in his Democratic Convention acceptance speech. He said, “We know that churches and charities can often make more of a difference than a poverty program alone.” But looked at more closely, the words “often” and “more” are important qualifiers. The president was actually saying that charities do not always make a difference and if they do it is by adding to what government is already doing.

Judging from this remarkably backhanded compliment, it is possible that the president actually regards charities as competitors of government. Both, as he may see it, are in the business of helping people. If it is done through charity, there is no way to win votes in the process. If it is done through government, voter constituencies may be created, which is something that politicians may want, but which we as a society should reject.

Charity is not just another crony capitalist tool. To keep it free from this taint, we should reject another Peter Orszag proposal, that in exchange for eliminating the charitable deduction on large gifts, government would provide a 15% match on smaller charitable gifts. Even Orszag admits that religious gifts would have to be excluded, and, realistically, that would only be the beginning. Once government started matching, it would be no time at all before government would start choosing eligible charities and directing ever more tightly how the money can be directed.

At the moment, without this kind of government interference, charitable programs for the poor are effective, much more effective than government programs, as the next chapter will discuss. Furthermore, charities offer a diversity of approaches. They are a laboratory of ideas and actions, something that the government can never be. They also represent people-to-people solutions, the democratic ideal in action.

Most countries do not have a thriving nonprofit sector. Europe does not have it, nor Japan. This has been a uniquely American phenomenon, recognized and encouraged by our tax laws. Now it is under attack and only time will tell if it survives.