Total charitable contributions have seen a steady rise over the past few decades, minus a couple years when the economy tanked.¹ Yet over the last couple of decades, the percentage of households giving to charity has been in decline and the median amount given has been at best stagnant (see graph below). Given these facts and some simple algebra, we can figure out that the reason charitable contributions have gone up is because the wealthy are giving more. Though this might not seem bad at first blush (after all isn’t it better that the wealthy have a sense of noblesse oblige?), the picture appears less rosy when one realizes that American tax dollars are being used to fund the status jockeying of the elite. Let’s back up a little.
Charitable contributions are tax-deductible, so tax dollars that would otherwise go to the government don’t. These tax deductions almost solely benefit the wealthy because the lower and middle classes rarely give enough to forgo the standard deduction in favor of itemizing deductions. 21% of households itemized their charitable deductions in 2017 and with the rise in the standard deduction, that percentage is expected to fall to just 9% in 2018.² Therefore, the vast majority of households that make charitable contributions do not benefit in any way when it comes to their taxes and those benefits accrue instead to those who least need it, i.e. the wealthiest individuals.
Even if you are not appalled by the unfairness that the wealthiest are the sole beneficiaries of these tax benefits, you should still be concerned because of the tax revenues that the government misses out on, tax dollars that would have been spent on the American people. Whatever your feelings are about the size of the government, at least it is ultimately accountable to the electorate. If we are concerned about how it is spending our tax dollars, we can elect representatives that change the situation. However, we have no control of the whims of the elite; they can choose whichever charity they want to bless with their money.
Maybe you’re still not convinced. After all, isn’t it still better that the rich give to charity despite being subsidized by tax dollars? Well, no, because the charities that they give to might not be entirely legit and can simply be a way to park money or evade taxes.³ ⁴ There are also issues with perfectly legal methods of charitable donations such as appraising the value of what was given. Consider a simplified hypothetical example. I bought a Picasso two years ago for $1 million and am now considering donating it to a museum for a tax write-off. I hire three appraisers and they come back with values of $2 million, $3 million and $5 million respectively for the painting. Of course, I go with the highest valuation and write-off $5 million on my taxes, but maybe on the open market, the value of the painting would be only $2 million. Had I sold it on the open market, I would’ve made $1 million in profit on the sale, $720k after taxes. But, if I give it to the museum, I can deduct $5 million off of my income which is worth $1.85 million (37% of $5 million), so I come out ahead more than a million dollars due to my charitable donation. The museum does not care because they ultimately still receive a valuable piece of art; the only party that loses is us ordinary taxpayers.
“Okay,” you say, still unconvinced, “what about those who do not cheat the system by avoiding taxes and value their charitable contributions in the most morally-praiseworthy manner? Should we not still encourage those people to give by giving them tax breaks?” Again, my answer would be no, because we can’t affect the organizations they give to. Studies find that the wealthy give most to museums and universities (you know, places that are really strapped for cash).⁵ Why should we be subsidizing Phil Knight’s $400 million donation to Stanford, an institution that boasts a $26.5 billion endowment?⁶ Phil Knight would almost certainly have given a similar amount even if charitable donations were not tax-deductible. After all, by donating such an amount, he can signal his generosity and have his name and legacy forever plastered on Stanford’s buildings. I’m not saying that his donation should be condemned; in fact I think it should be praised, even though I do not think Stanford needs the money. All I’m saying is that we should not subsidize his donation especially as it is a donation that would’ve happened anyways. The same applies to those who give vast sums to museums like the Met for seats on the board or other symbols of their status.
Even the most ethically run, praiseworthy donations such as the creation of the Bill and Melinda Gates Foundation should not benefit from tax deductions. The foundation’s initiatives are mostly for countries outside the U.S., which is not a problem, except for the fact that they’re dollars that otherwise would have gone to the U.S. government. If the American people decide that we want to spend those dollars abroad, that is our prerogative, but right now we have no say what the Gates Foundation does with our tax dollars. And again, just as with Phil Knight’s donation to Stanford, Bill and Melinda Gates would almost certainly have created the foundation even without the tax benefits. A cynical person might say it is Bill Gates trying to secure his legacy or to cleanse his conscience of his business misdeeds. I think that may be a small part of it, but I think he mostly just wants to do good for the world. I want to reiterate, what he and other wealthy philanthropists are doing is laudable; in fact, they’re probably better people than me, as I have not given anything to charity. I’m very grateful and happy that the Gates are choosing to spend their fortune in such an exemplary way and I highly encourage other wealthy individuals to do the same. Just please do it after paying taxes first.