Tuesday, April 14, 2015

"Your Gift is Tax Deductible"

“Your Gift is Tax-deductible”

With this phrase—“Your gift is tax-deductible”—many novice fundraisers hope they have put forward the final unassailable argument for making a donation.  “Your gift is tax deductible” falls right after “We do good work” and “We help people” in the lexicon of not very useful arguments in favor of donating.

There are three problems with this phrase, and here they are in ascending order:

1) Your gift to any of the now 783,000 public charities (with 501(c)3 tax designation) that currently exist in the United States is tax deductible.  Tax deductibility does not make any one organization particularly special.
2) Your deduction is based on your tax bracket, so the higher the bracket the more you can deduct.  Seventy percent of Americans file a short form and, thus, do not get to deduct their donations.  That promise is simply not true for most of your donors.
3) Suggesting that a benefit of giving away money is that the government has less money should not be attractive except to anti-government ideologues.

The charitable deduction grew up alongside the introduction of income tax, which itself was first put into place to help pay for the Civil War.  The first income tax (2% on income greater than $4,000) was instituted in 1861 but a year later was ruled unconstitutional.  Years later, in 1913, the 16th Amendment was passed which gave Congress the legal authority to collect income taxes. The highest rate was set at 7%, and only the top 10% of wealthy Americans had to pay. In 1917, to pay for the cost of World War I, the top tax rate was raised to 77% and shortly after that, the charitable deduction was introduced to help the war effort by encouraging people to make donations to the War Chest and to the Red Cross.  Until 1944, everyone could take advantage of the charitable tax deduction, but to pay for World War Two (are you starting to see a pattern?) income tax was expanded and the highest tax bracket was set at 94%. However, only that portion of a person’s earnings above $400,000 were taxed at that rate.  

About 70% of all Americans had to pay some income tax and could deduct their charitable giving, but to simplify filing taxes, in 1944 Congress created the “standard deduction” which essentially gave all taxpayers a fixed amount they can deduct from their taxes. Currently, only about 30% of taxpayers are able to deduct more than the standard deduction of $6,200, and they are the only ones that actually receive any direct tax benefit for their donations.  In recent years, the highest tax bracket is only 35%, so even the very rich have far bigger and better loopholes for avoiding taxes than the charitable tax deduction.

All this helps to illustrate why I am most concerned about the point I raise in Problem #3: that taking money out of the tax stream and giving it to a non-profit should be seen as a positive action.  Let’s face it: any human being who lives in the United States and, from time to time, walks on the sidewalk, drives on a road, eats in a clean restaurant, takes the escalator instead of the stairs, or drinks clean water from a faucet, is the recipient of some of the good that taxes do. There is a giant infrastructure that makes life in this country possible, from ambulances to fire departments to public schools to national parks and more—all made possible by taxes.  Taxes are not perfect and they are certainly not perfectly levied.  No one agrees with all of the things taxes pay for and none of us are happy when some people (including corporate persons) don’t pay their share.  But imagine a country without taxes and think about the quality of life you would have there.

We who work and volunteer for nonprofit organizations have a particular stake in any tax discussion.  Many economists will tell you that they can predict how many homeless people a town will have, how good their schools will be, how thriving their arts and culture will be, even how well lit their streets will be, just by looking at their tax structure.  Taxes are a mirror of community values. Poor schools, inadequate health care, a degraded environment are all reflections on our current tax and budget structure.

The nonprofit sector is asked to pick up the pieces caused by poor tax policy.  Cuts in food stamps?  No problem—the food pantries will take care of that.  Terrible public schools?  No problem—PTAs will raise money for art program, music and libraries.  A minimum wage that does not keep you out of poverty?  That’s ok.  Nonprofits will fill in the gaps.

We have been asked to do more and more with less and less for decades.  We need to stop doing that.  We need to teach ourselves and our constituents what fair and just tax policy would look like, to think about what taxes could pay for that foundation grants and grassroots fundraising will never be able to cover, and we need to encourage people to be proud of the taxes we pay.

So this April 15, help a donor understand that the common good, the society we all want, requires appropriate taxation, and say with pride, “I LOVE TAXES.”   

Resources for this article and a lot more very helpful information:
http://ihearttaxes.org/hooraytaxes, www.compasspoint.org/nonprofitstalkingtaxes, www.nationalpriorities.org/,//toomuchonline.org/  

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