Happy Birthday! The Charitable Deduction Turns 100
On June 28, 1914, political assassins killed Austria’s archduke and his wife, leading to the Austro-Hungarian invasion of Serbia and the beginnings of war across Europe. The United States was drawn into the war in the spring of 1917. On October 3, to raise money for the war, the U.S. passed the War Revenue Act of 1917, substantially increasing taxes on the wealthiest taxpayers. The new flat tax of 1915 gave way to a light progressive tax in 1916, paving the way for a steep progressive tax in 1917. Households earning $2 million or more paid 2 percent in income tax in 1915, but were paying 67 percent by 1917. The war effort was thereby funded by wealthy families.
To provide some relief for these steep rates, the federal government provided ways for households to reduce their taxable income. The War Revenue Act introduced and codified what we know today as the charitable deduction. Details have been altered and clarified over the past 97 years, but the central mechanism is the same. The charitable deduction is a vital nexus between the general public, the nonprofit organizations they support, and government policy. It is a basic feature of the charitable sector in the United States.
So, Happy Birthday to the Charitable Deduction! Kudos to Georgia Congressman John Lewis for advancing a concurrent resolution back in March to recognize the centenary of the charitable deduction. The resolution opens with the observation that the deduction “is one of the oldest preferences in tax law.” How does the deduction work? The federal government confers a power on particular organizations that they believe are helpful to civic engagement, service delivery, or fostering of common values. That power is that they are able to pass along a benefit to their donors, or at least the ones that itemize their individual income taxes. I tell my students that the deduction is a “tool of government”: the federal government gives us financial incentives to spend our money in certain productive ways. If I make a donation to a qualified public charity, operating foundation, school, or even to government, my taxable income decreases by the amount of my donation.
Although the deduction is not available to people who do not itemize (some amount of charitable contribution is priced into the standard deduction), and some donors say that the deduction is irrelevant to their giving, it clearly does matter to some donors. Given a choice between donating to Organization A and getting a tax break, and donating to Organization B and not getting a break, I’m likely to go with Organization A. In fact, my family gives to some nonprofits each year only because of the charitable deduction, or because of the generous tax credits available to Arizona donors. The data suggest that my family is not alone in this, and the nonprofit sector is the better for it. Many nonprofits draw in both small donations and major gifts because the federal and state government is willing to forego revenue in order to support community organizations. It all started with the War Revenue Act of 1917.
On October 3, this essential tool turns 100. Many happy returns!
Mark A. Hager is Associate Professor in the School of Community Resources & Development, where he is co-director of graduate studies in nonprofit leadership and management. He is Editor-in-Chief of Nonprofit Management & Leadership.
Hager joined the faculty at ASU in 2008. Before moving to Phoenix, he was a Senior Research Associate in the Center on Nonprofits and Philanthropy at the Urban Institute, a Washington D.C. think tank.
His research includes studies of the scope, dimensions, administration, and financial operations of and reporting by nonprofit organizations. Hager earned his Ph.D. in organizational sociology at the University of Minnesota with a study of the causes of nonprofit organization closure.
Hager is a faculty affiliate of the ASU Lodestar Center for Philanthropy & Nonprofit Innovation and the ASU Center for Organization Research and Design (CORD). He is a member of the graduate faculty in the School of Community Resources & Development, the School of Social Work and the sociology programs in the School of Social and Family Dynamics.
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