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Founders’ Fortunes and Philanthropy: A History of the U.S. Charitable-Contribution Deduction

Published online by Cambridge University Press:  27 August 2019

Nicolas J. Duquette
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Abstract

Since 1917, tax filers in the United States who itemize tax deductions have been able to subtract gifts to eligible charities from their taxable income. The deduction is especially valuable to successful entrepreneurs who donate corporate stock. Such philanthropy was seen as a close substitute for government spending until after the mid-twentieth century. In the 1950s and 1960s, high tax rates catalyzed the formation of large foundations from industrial fortunes and precipitated a national debate about the legitimacy of such giving. The midcentury debate preceded increased oversight of charities and foundations and a shift in the way U.S. lawmakers regarded the contribution deduction—from a subsidy by philanthropists of public goods government would otherwise provide to an implicit public cost.

Keywords

philanthropycharitable-contribution deductionpolicy historyUnited States
Type
Research Article
Information
Business History Review , Volume 93 , Issue 3: Entrepreneurship and Philanthropy , Autumn 2019 , pp. 553 - 584
Copyright
Copyright © The President and Fellows of Harvard College 2019 

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Footnotes

The author is grateful for comments from Eric Allen, Ed Kleinbard, Jim Ferris, and two anonymous referees, as well as from session participants at the Policy History Conference and ARNOVA. All errors are the author's.

References

1 The George W. Bush administration proposed limiting the deduction for high earners to those giving the largest amounts relative to income and using the resulting tax savings to pay for a deduction for all. See Ackerman, Deena and Auten, Gerald, “Floors, Ceilings, and Opening the Door for a Non-Itemizer Deduction,” National Tax Journal 59 (Sept. 2006): 509–30CrossRefGoogle Scholar. Proposals from the Obama administration focused on converting the deduction to a flat rate per dollar donated, so there would be no additional subsidy for high earners. See Suzanne Perry, “Obama's Plan to Reduce Charitable Deductions for the Wealthy Draws Criticism,” Chronicle of Philanthropy, Feb. 2009; Alex Daniels, “Obama Budget Again Calls for Limit to Charitable Deduction,” Chronicle of Philanthropy, Feb. 2015; and Cordes, Joseph J., “Re-thinking the Deduction for Charitable Contributions: Evaluating the Effects of Deficit-Reduction Proposals,” National Tax Journal 64 (Dec. 2011): 1001–24CrossRefGoogle Scholar.

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13 55 Cong. Rec. S6741 (1917).

14 55 Cong. Rec. S6729 (1917).

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16 Cited in Brilliant, Eleanor L., Private Charity and Public Inquiry: A History of the Filer and Peterson Commissions (Bloomington, IN, 2000), 21Google Scholar.

17 Quoted in Revenue Code of 1954: Hearings before the Committee on Ways and Means, House of Representatives, 83rd Cong. 162 (1954).

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19 The max operator denotes the greater of the two (the standard deduction or the sum of all available itemized deductions).

20 The standard deduction is an amount independent of the filer's itemized contribution items; for example, in tax year 2017 married couples filing jointly had a standard deduction of $12,700. It makes sense to claim itemized deductions only if they sum to more than the standard deduction. Because high-income households tend to owe more state income tax and carry larger mortgages, they are much more likely to be itemizers than low- or middle-income households.

21 For example, imagine a high earner paying the top 2016 tax rate of 39.6%. Suppose that person gives $1,000 to charity. The donor then reduces the tax owed by 39.6% × $1,000 = $396. Therefore, the actual cost of making that contribution was $1,000 − $396 = $604, or 60.4% of the value received by the charity.

22 Nor does the receiving charity owe capital gains tax if it liquidates the donated shares, because charities are exempt from corporate income tax.

23 That is, θ ≡ (market value − cost of acquiring the shares)/(market value). For example, if the taxpayer bought some stock at a price of $40 per share and donated it when its value was $100 per share, then ${\rm \theta} = \displaystyle{{100 - 40} \over {100}} = 60{\rm \%} $.

24 To continue the example above, now imagine a taxpayer donates $1,000 worth of stock held in a taxable account that has doubled in nominal value since it was purchased (θ = 0.5). The donation yields $396 in tax savings against ordinary income tax and also avoids $1,000 × 0.5 × 15% = $75 of long-term capital gains tax at the 2016 capital gains tax rate of 15%. The total tax reduction is $471, and the taxpayer loses just $529 in giving the recipient organization $1,000.

25 See the discussions in Peloza, John and Steel, Piers, “The Price Elasticities of Charitable Contributions: A Meta-analysis,” Journal of Public Policy & Marketing 24 (Fall 2005): 260–72CrossRefGoogle Scholar; Bakija, Jon and Heim, Bradley, “How Does Charitable Giving Respond to Incentives and Income? New Estimates from Panel Data,” National Tax Journal 64 (June 2011): 615–50CrossRefGoogle Scholar; and Duquette, Nicolas J., “Do Tax Incentives Affect Charitable Contributions? Evidence from Public Charities’ Reported Revenues,” Journal of Public Economics 137 (May 2016): 51–69CrossRefGoogle Scholar.

26 In the public economics literature, wealthy corporate founders are likely overlooked for data reasons: there are not many of them, their anonymized tax returns are indistinguishable from other very-high-income households, and surveying them is impractical.

27 Not all U.S. states have income taxes, and not all state income tax systems have a charitable-contribution deduction. However, some states that are important for the philanthropic sector (including California and New York) do.

It is difficult to characterize the contribution of the estate tax to living donors’ incentives without knowing individuals’ expectations about their time left to live and further appreciation of any shares over that period. However, giving while living is generally preferable to giving at death, because living donors avoid both income and estate taxation on the donated amounts; charitable bequests avoid only the estate tax. See David Joulfaian, “Charitable Giving in Life and at Death,” in Rethinking Estate and Gift Taxation, ed. William G. Gale, James R. Hines Jr., and Joel Slemrod (Washington, DC, 2001), 350–69. Charitable bequests do have the advantage of being deferred until death (leaving donors lifelong control of their property), and there is no limit on the deductibility of charitable bequests from the estate tax base.

28 84 Cong. Rec. 7497–98 (1939).

29 Revenue Act of 1951: Hearings before the Committee on Finance, Senate, 82nd Cong., 1st sess. 1026 (1951).

30 98 Cong. Rec. 6318 (1952).

31 Internal Revenue Code of 1954, §170.

32 Witte, Politics and Development of the Federal Income Tax, 149.

33 100 Cong. Rec. 3461 (1954).

34 100 Cong. Rec. 1027–29 (1954). Specifically, Butler argued that “this provision would rule out this extra benefit from such institutions as orphanages, homes for the aged, and correctional institutions for youth operated under religious auspices. It may very well be that the House of Representatives had a purpose in limiting this extra benefit, but it is difficult to imagine that such worthy institutions as these should not be accorded full benefits of this legislation” (pp. 1027–28). Note that in 1954 there were four male representatives in the House named Smith. The Congressional Record does not note which Mr. Smith was present for this hearing.

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40 Boris, Elisabeth T., “Creation and Growth: A Survey of Private Foundations,” in America's Wealthy and the Future of Foundations, ed. Odendahl, Teresa (New York, 1987), tables 4-6 and 4-12Google Scholar.

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42 Chairman's Report, Tax-Exempt Foundations and Charitable Trusts, 1962 and 1969. See also the Wall Street Journal, 23 Aug. 1962, 3, and the New York Times, 23 Aug. 1962, 14.

43 Wall Street Journal, 7 Jan. 1963, 20; Christian Science Monitor, 7 Jan. 1963, 9; Domhoff, G. William, Who Rules America? (Englewood Cliffs, NJ, 1967)Google Scholar; Lundberg, Ferdinand, The Rich and the Super-Rich (New York, 1968)Google Scholar.

44 Lundberg, The Rich and the Super-Rich, chap. 10.

45 Baum and Stiles, “Power Pools.”

46 Domhoff, Who Rules America?

47 Brilliant, Private Charity and Public Inquiry, 76–86.

48 Brilliant, 76–86.

49 “Ordinary income property” refers to objects that, if retained by the donor, would be used to create ordinary earned income, not capital income. This rule left untouched the additional tax benefit for donating financial securities or collectible artworks.

50 Tax Reform Act of 1969: Hearings before the Committee on Finance, Senate, 91st Cong. 6056 (1969) (statement of Senator Albert Gore Sr. of Tennessee).

51 Brilliant, Private Charity and Public Inquiry, 116–18.

52 Brilliant, 45–46, 127–36; Hall, Peter Dobkin, Inventing the Nonprofit Sector and Other Essays on Philanthropy, Voluntarism, and Nonprofit Organizations (Baltimore, 1992), 76–78Google Scholar.

53 Hall, Inventing the Nonprofit Sector, chap. 1.

54 Brilliant, Private Charity and Public Inquiry, 143–67; Smith, David Horton, “A History of ARNOVA,” Nonprofit and Voluntary Sector Quarterly 32 (Sept. 2003): 458–72CrossRefGoogle Scholar.

55 The idea of a tax “price” for charitable donations appears to originate from Taussig, Michael K., “Economic Aspects of the Personal Income Tax Treatment of Charitable Contributions,” National Tax Journal 20 (Mar. 1967): 1–19Google Scholar. The emphasis on whether the tax subsidy induces greater or lesser contributions than foregone tax appears in Feldstein, Martin, “The Income Tax and Charitable Contributions: Part I—Aggregate and Distributional Effects,” National Tax Journal 28 (Mar. 1975): 81–100Google Scholar.

56 Feldstein, “The Income Tax and Charitable Contributions: Part I—Aggregate and Distributional Effects”; Feldstein, Martin, “The Income Tax and Charitable Contributions: Part II—The Impact on Religious, Educational and Other Organizations,” National Tax Journal 28 (June 1975): 209–26Google Scholar; Commission on Private Philanthropy and Public Needs, Giving in America: Toward a Stronger Voluntary Sector: Report of the Commission on Private Philanthropy and Public Needs (Washington, DC, 1975)Google Scholar; Brilliant, Private Charity and Public Inquiry, 127–67.

57 See the discussion in Bakija, Jon and Heim, Bradley, “How Does Charitable Giving Respond to Incentives and Income? New Estimates from Panel Data,” National Tax Journal 64 (June 2011): 615–50CrossRefGoogle Scholar.

58 Brilliant, Private Charity and Public Inquiry, 123.

59 Specifically, taxpayers had to pay unrealized capital gains on donations of stock if they were subject to the alternative minimum tax (AMT). The AMT sets a floor on the income tax owed by high earners who reduce their tax liability “too much” through the use of legitimate deductions. Charitable contributions are deductible from AMT income, but from 1987 to 1992 gifts of stock were subject to capital gains tax. Company founders giving primarily unrealized capital gains would have had no benefit from donations beyond the point where giving was sufficient to trigger AMT liability, effectively ending the tax rationale for large gifts of corporate stock.

60 Odendahl, Charity Begins at Home, 63.

61 Wall Street Journal, 7 July 1982, 4.

62 Salamon, Lester, “Nonprofit Organizations: The Lost Opportunity,” in The Reagan Record: An Assessment of America's Changing Domestic Priorities, ed. Palmer, John L. and Sawhill, Isabel V. (Cambridge, MA, 1984)Google Scholar.

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64 Ronald Reagan, Oct. 1981, quoted in Salamon, “Nonprofit Organizations: The Lost Opportunity.”

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67 Duquette, “Inequality and Philanthropy.”

68 Tax Policy Center, “Impact on the Number of Itemizers of H.R.1, the Tax Cuts and Jobs Act (TCJA), by Expanded Cash Income Level,” simulation, published Jan. 2018, https://www.taxpolicycenter.org/model-estimates/impact-itemized-deductions-tax-cuts-and-jobs-act-jan-2018/t18-0009-impact-tax.

69 Alliance for Charitable Reform, “Universal Charitable Deduction, CHARITY Act Offered as Amendments to Senate Tax Reform Bill,” published 13 Nov. 2017, http://acreform.org/news-release/universal-charitable-deduction-charity-act-offered-amendments-senate-tax-reform-bill/.

70 Duquette, “Do Share-of-Income Limits on Tax-Deductibility of Charitable Contributions Matter for Charitable Giving?”; Tax Cuts and Jobs Act of 2017, Pub. L. No. 115–97, 131 Stat. 2054 (2017).