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The Charitable Deduction
Fundamental to our Culture
By Mike Davenport
Given the increasing rhetoric surrounding the scope of our national debt during this election season, we are hearing more and more about taxes and the complexity of our tax system. Among the twenty largest individual tax expenditures is the deduction for charitable contributions. Each of the twenty expenditures will be on the table for discussion and debate during the remainder of the election season, and by the Administration and Congress over future months and years in the effort to reduce our debt.
We thought it might be useful provide some historical perspective on the charitable deduction which is so near and dear to nearly 2 million active charitable organizations and to the millions of individuals who so generously give and itemize on their tax returns.
The tax deduction for charitable contributions goes back ninety-five years with the passage of the Revenue Act of 1917. The primary purpose of this act was to provide revenue to offset the costs of World War I. The deduction for charitable contributions was in response to Congressional concern that higher tax rates imposed by this Act would discourage private charity. The philosophy for the charitable contribution deduction was that if government subsidized the work of private organizations it would be considered a viable alternative to direct government programs. Corporations were first allowed deductions for charitable contributions in 1935.
As additional historical notes, the estate tax charitable deduction came into being as part of the 1921 Tax Act. It was applicable to all decedents who died after December 31, 1917. The Gift Tax charitable deduction came into being as part of the Gift Tax Act of 1932.
Over the years, the charitable deduction for contributions has provided a significant incentive powering the missions our country's charitable organizations in maintaining and improving everyone's quality of life. In 2011, almost $300 billion was contributed to charitable organizations, and 88% of that was given by individuals. Those who itemize on their tax returns have been incentivized and have benefited from the charitable deduction.
In April, 2011, a Gallup poll found that 7 in 10 Americans oppose eliminating the charitable deduction, regardless of whether the savings would be used to lower their taxes or reduce the deficit. The poll found that, even among those Americans who do not claim the charitable deduction, 62% are opposed to the elimination of the charitable deduction.
According to a March 2012 Congressional Research Service study, the deduction of charitable contributions is the 9th largest individual tax expenditure representing a mere 4.3% of all tax expenditures.
Given our work in the world of philanthropy and our passion for the many millions of donors and the missions of the charitable organizations they support so generously, we are opposed to any efforts to reduce or eliminate the deduction for charitable contributions. Philanthropy is an integral part of our culture, and our American society is the great beneficiary of our generosity. While reducing our national deficit is important, focusing on this 4.3% item is not a good trade off.
One thing is certain, we will be discussing taxes, deductions and their effects on philanthropy and charitable organizations more frequently in the coming months.
Sources: Congressional Research Service Report to congress 2012; the Encyclopedia of Taxation and Tax Policy; Independent Sector; Gallup; Giving USA Foundation; Arthur Anderson Tax Economics of charitable Giving
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