On his trip to the United States in the 1830s, Alexis de Tocqueville, one of the great thinkers of the 19th century and author of the seminal work, Democracy in America, observed a culture of collaboration where people in the new world worked to support each other. This way of life, a distinguishing feature of American democracy and culture, was a contrast to the old world, where people relied on the aristocracy, government or the church to solve their problems.
The contrast remains today. In countries with higher tax rates, services for the poor and elderly are covered by government, and charitable giving as a percentage of GDP is lower than in America. Here in the United States, where taxes mostly remain low in comparison to many developed world nations, vulnerable populations are supported through philanthropy to a much greater extent.
Americans, as a culture, inherently view philanthropy as part of our historic and ongoing commitment to bettering communities. As Tocqueville observed, “I have often seen Americans make large and genuine sacrifices to the public good, and I have noted on countless occasions that when necessary they almost never fail to lend one another a helping hand.” The recent responses to natural disasters once again re-affirm this culture of giving – both of time and treasure.
Charitable giving is part of the DNA of this nation and has been an American tradition since before the advent of the income tax. Interestingly, the rate of income tax, when overlaid with philanthropic giving, shows little correlation to a fluctuation in the value of annual gifts. Americans feel bound to contribute regardless of their tax rate.
The Trump administration and Republican leaders in Congress reportedly plan to make tax reform a priority throughout the fall, leaving many in the philanthropy world to wonder how a new tax structure will affect charities. While there is no doubt that our tax structure is far too complex, the long-standing commitment to our American culture of supporting each other must play a role in policy-making.
Here are a few considerations Congress should keep in mind as they begin crafting legislation:
Many corporations have foundations of their own (e.g. ExxonMobil Foundation, Goldman Sachs Foundation). If corporate tax rates are reduced, as was proposed on the campaign trail in 2016 by now-President Trump, that would provide more revenue for companies, which could and should mean more charitable giving by their foundations. The eventual legislation should seek to create a higher level of corporate philanthropy through incentives.
New, Innovative Incentives
For more than a decade, charitable giving in the U.S. consistently hovered at 2 percent of GDP. Clearly, increased economic growth will increase total philanthropy. While charitable giving triggers a tax break, opinion research shows that’s not the primary reason why people feel motivated to contribute to charities. How else can we stimulate philanthropic donations to grow at a rate more than 2 percent of GDP? Are there ways lawmakers haven’t yet explored that would motivate more giving? For example, as tax reform theoretically results in more money staying in American wallets, would a tie to personal income be more relevant for donors? Lawmakers should look for 21st century ideas to stimulate giving and growth of the not-for-profit sector that will provide services for even more Americans in need rather than being strapped and therefore require government to provide even more services.
Offset Federal Cuts
As we’ve seen recently with the National Institutes of Health and the National Endowment for the Arts, federal investments in many of our nation’s long-standing institutions are declining. Stepping into the breach? Nonprofits, foundations and the philanthropic community who are unwilling to let the potentially disastrous effects of those cuts to medical research and the arts, among many other services, become a reality. While the most recent levels of proposed cuts would be catastrophic to medical, cultural and community services, increased incentives to give may fill some gaps as a bridge to new funding models.
If Congress wants to simplify the tax code, they could simultaneously simplify restrictions on giving and recognize charitable giving at all levels rather than only at the highest levels. This could result in a culture shift around donations allowing gifts from all people at all income levels to be equally valued and further enhance the long-standing culture of philanthropy that is still highly regarded in America today as it was in the time even before the founding of our nation.
Let’s encourage Congress to live up to the American legacy of lending a helping hand when considering tax reform this fall.