War on Charity?

For the past few days I’ve been reading and pondering Conor Clarke’s mild dislike of the idea that the government ought to encourage philanthropic giving. (Hell, it’s not just a mild dislike; it’s a “war on charity“.)

The proximate cause of Conor’s war is the debate surrounding Obama’s plans to put a cap on federal tax deductions for charitable giving (plans which the Administration may back down on in the face of opposition within his own party). He opposes the current federal inducements to philanthropic giving because:

1) They’re regressive and unfair:

If you are in the highest tax bracket you can deduct $350 for a $1000 donation. If you are in the lowest tax bracket you can only deduct $150 on a $1000 donation.

2) They are expensive in terms of lost government revenue:

Every dollar the government gives up in income-tax revenue is one more dollar it isn’t spending on its own programs.

3) Dollar for dollar, government spending does a better job than philanthropic spending at benefiting society as a whole:

I agree that the purpose of the system was to maximize the dollars going to socially beneficial activities. But this is an empirical question: where do those deducted charity dollars actually go? My reading is that they go to the local opera house and not the local soup kitchen. I think that is regressive redistribution.

[NB: The quotes are taken from both of Clarke’s posts linked to above, including his responses in the comments section.]

Regarding the first point about the regressiveness of the deductions: True, but so what? If it can be demonstrated that a system deemed “unfair” (by the way, deemed unfair by whom?) generates greater social benefit overall than one that measures up to someone’s intuitive sense of fairness, who really cares whether it’s “regressive” or “progressive”? And the fact is, if we’re aiming to maximize the number of charitable dollars being voluntarily redistributed towards public goods, then naturally we would want to craft a tax code that nudges the rich more urgently than it nudges any other strata, for the simple reason that the rich can and do donate more to charity in absolute terms than do the poor or middle class.

Clarke’s second point is merely a statement of the obvious, but one can be misleading even when stating the obvious. Let’s take the hypothetical $1,000 donation mentioned above. Assuming that $1,000 would have been taxed at 35 percent, that means the government is forgoing $350 in revenue. But it’s not doing so for nothing. In effect, the government is “paying” $350, or rather forgoing $350 in spending, in order to secure $1,000 freely spent for some other public purpose of the taxpayer’s choosing. As Clarke says, it operates kind of like a giant grant-matching program.

In his third point, Clarke correctly notes that this only makes sense if that hypothetical $1,000 creates more in the way of public good than the government’s spending $350. He suspects that wealthy charitable giving is more likely to go to highbrow charities like opera houses rather than soup kitchens. Now, besides giving short shrift to the very real, if not always easily quantifiable, societal benefits of support for the arts, Clarke’s suspicion demonstrates rather glaring ignorance about where charitable donations really go. The chart below, culled from a 2007 report by the American Association of Fundraising Counsel (summarized here), shows that arts-related charities take in only a tiny fraction (4%) of overall charitable giving.

[NB: “Religion” includes not just giving to churches but also giving to religious charities, whose missions may otherwise belong in one or more of the other categories.]

And if Clarke is skeptical that the hypothetical $1,000 isn’t being spent wisely on schools, clinics and soup kitchens for the poor, I’m even more skeptical that the government’s hypothetical $350 is being more carefully spent. It helps here to remember that “government” doesn’t determine where this money is spent; Congressmen do. And as the many public works projects in West Virginia bearing a certain Senator’s name attest, public servants have a capacity for venality that at least matches, if not exceeds, that of the very rich.

I’m not making these snarky ripostes to argue that government is always and everywhere the problem, not the solution, or that private philanthropy is always the most efficient provider of public goods. Far from it, in fact. (I’ll allow those with a more doctrinaire libertarian bent than I to make that case.) Rather, I’m defending philanthropy because it is a vitally necessary attribute for a country with a constitutionally limited government. Limited government, in turn, is crucial to fostering a dynamic, opportunity-creating economy. And philanthropy makes up for limitations on government action by supporting public goods that are neither economically nor politically feasible in a majority-rule system.

There’s an important debate to be had about what kinds of charitable giving the government ought to encourage through the tax code. But “soak the rich”-style populist impulses don’t constitute a useful contribution to that debate.