Who Would Be the Real Loser if We Pitched the Charitable Deduction?

I’m seeing more and more calls for the abolition of the charitable deduction, like this one from Martin Hutchinson at Asia Times Online:

At this season of goodwill, my thoughts immediately turn to that unsung hero Ebenezer Scrooge, and this year, in view of the subject’s topicality, to his possible thoughts on today’s major economic policy problem in the United States of tax reform and budget deficit reduction.

One thing immediately springs to mind: he would wish to eliminate the income tax deduction for charitable contributions. Old Ebenezer would in this case be magnificently right.

But who would suffer?

For Christians, the first thought is simple: churches and parachurch organisations.  But maybe not.  Consider this:

Private contributions represented $144 billion, 12% of charitable income, government grants and payments totaled $351 billion, private payments for services represented $590 billion, investment income $81 billion and other income $30 billion. Private contributions were most important in arts and environmental charities, representing over 40% of funding for those sectors (albeit only $19 billion in total) while they represented only 2% for funding for healthcare charities, for example.

The differences in charitable giving between bottom and top-income brackets are striking. For example, 41% of charitable donations directed at the poor come from those earning less than $100,000 (almost none of whom itemize deductions), whereas only 14.6% come from the really rich, with incomes over $1 million. The really rich direct 21% of their charitable donations to the poor, directly or indirectly, compared with 30% for the population as a whole.

Although this doesn’t answer the question directly, it’s obvious that the main beneficiaries of the deduction are major donors, mostly wealthy people.  Churches and charities who derive the bulk of their income from small donors would not be affected as much.  That includes most churches and parachurch organisations in the Evangelical world.  Those who cater to a higher income stratum (like TEC) would have another experience altogether.

Another interesting set of statistics is this:

Employment in the charitable sector is highest in the District of Columbia, with 16.3% of its workforce employed in that sector, then Rhode Island with 13.6%, then New York with 13.3%. At the other end of the scale, Nevada has the lowest charitable employment, at 1.8%, followed by South Carolina, Louisiana and Mississippi, followed by Texas with 4.1% employed by the charitable sector. Colorado, California and Florida are all towards the low end of the scale.

Immediately one fact jumps out at you from this comparison: charitable employment is strongly inversely correlated with economic growth. While there is only a modest correlation between charitable activity and income (Rhode Island is close to the national median income per capita, below Louisiana and Texas) the jurisdictions that have shown the most robust economic growth in the last 30 years are those where charities are least active.

Many of the states Hutchinson lists as “low charity” states are also Southern and “Bible Belt” states: SC, TX, MS, LA, etc.  That also includes Colorado, home to Focus on the Family and other organisations which are largely refugees from the People’s Republic of California (which also is low on the list).

When the Obama Administration attempted to reduce the charitable deduction, the organisations that defeated it were the “liberal” charities.  Those on the other side didn’t have the pull in the Congress now expiring (praise be to God!) to stop it.

This is another one of those issues where the political dynamics are counterintuitive, and that needs to be kept in mind when the next run against the charitable deduction takes place.

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