Taxes and Charity Are a Double Edged Sword

There is a strange relationship between charity and taxes.  Tax deductible donations are currently honored for those that itemize their tax returns, reducing tax payments by up to 39.6% of the eligible donation.  With a budget crisis at hand, lawmakers are considering capping that tax break down to 28% of each dollar donated.  The University of Indiana has estimated that capping the tax break on charity would decrease gifts by well over $2 billion dollars a year.  The proposal raises questions about the value of charitable giving and whether the government believes that it can spend money better than charities.

On the other hand, tax breaks for charity shows that it really just benefits the wealthiest people.  Millionaires and billionaires receive a much larger portion of tax breaks than other Americans.  Part of the justification for the proposal is to make tax rates fairer for the middle class.  Further, allocations for charitable giving are not going to causes that are most in need.  In fact, almost half (45%) of donations are given to religious or educational institutions.  That does not include religious affiliated charities such as the YMCA or The Salvation Army.

So the question becomes one of whether the government should be paying people to subsidize their house of worship or their alma mater.  A study showed that less than 10% of charitable giving helped people meet their basic needs such as food and housing.  Only 30% of charity was used to help the poor at all last year.  It is hard to say how charities overall will be affected by a change in tax law.

Regardless of the merit of charitable giving, the increase in revenue may not be worthwhile and many believe that tying charity into taxes at all is too complicated.  Why not just make the tax rates lower and get rid of tax incentives? Most people feel lower taxes would give a boost to the economy and allow people to take more risks on start-ups and innovators.  Would the amount of tax deductions affect your charitable giving? Why or why not?

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One thought on “Taxes and Charity Are a Double Edged Sword

  1. The thing to remember is that the real tax benefits are not to the donors, but to the nonprofit organization. If corporate tax is 35% or so, and the nonprofit doesn’t have to pay that tax, then that is a sizable benefit

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