We just made it through another tax season. Congress has begun debating whether and how to extend the Trump tax cuts from the 2018 Tax Cuts and Jobs Act. While many elements of that tax debate are worth commenting on, I want to highlight the standard deduction because it sheds light on an underappreciated part of American philanthropy.
Prior to the introduction of the federal income tax in 1913, charitable donations did not have meaningful tax deduction benefits. Yet Americans gave generously. In fact, if anything, American philanthropy has declined due to the Scrooge effect of the welfare state. “Are there no [state-funded] prisons [or work-houses]?” Ebenezer Scrooge asks in Charles Dickens’ A Christmas Carol.
The questions reveal that Scrooge (and others) feel that their higher taxes to fund a variety of social and “poverty-reduction” programs take the place of direct philanthropic giving. Americans also keep a lot less of what they earn today than they did a hundred or a hundred and fifty years ago—as most of us know from recent personal experience.
The case of welfare programs crowding out charity has been made eloquently by Marvin Olasky in The Tragedy of American Compassion. Various religious and fraternal orders provided health insurance, old-age insurance, and other social services to their members throughout the nineteenth and into the twentieth century. These services were later replaced by state unemployment benefit schemes, Social Security, Medicare, and Medicaid.
These government programs “crowded out” charitable, philanthropic, civil society—contributing to problems of declining social capital elaborated by Robert Nisbet (Quest for Community) and Robert Putnam (Bowling Alone). Government agencies and government checks replaced civic networks and systems of support. Yet American philanthropy is still alive and kicking in the U.S.
The Lilly Family School of Philanthropy at Indiana University estimates that Americans gave $557.16 billion to charity in 2023. That’s about $1,600 per capita. By comparison, Canadians gave about $400 per capita to charity and Brits gave about $250 per capita. Even as a percentage of GDP, the U. S. ranks well above European countries. According to one source, the U. S. is one of the most charitable countries in the world.
What’s remarkable is that the vast majority of Americans who give to charity receive no federal tax benefit from doing so. Returning to the individual exemption, when you file your taxes, you can either claim the standard deduction ($14,600 for an individual, or $29,200 for a couple) or you can itemize your deductions. A few expenses can count towards the itemized deductions, but these expenses are highly qualified and don’t add up to much for the average person.
From a benefit standpoint, your qualified expenses, including your charitable giving, must add up to more than the standard deduction before you receive any tax advantage. Suppose someone takes the entire $10,000 state and local tax deduction (SALT) and comes up with $5,000 more in other qualified expenses. They would still be $14,200 short of the $29,200 standard deduction for a couple. This means that any of their charitable giving, up to $14,200, does not render them any benefits on their federal taxes.
Seventy percent of American households earn less than $127,000 before taxes. So $14,200 would mean donating more than ten percent of their pre-tax earnings before they saw any advantage from the giving being “tax-deductible.” For most Americans, the “tax-deductible” element of charitable giving is practically irrelevant. Yet they give anyway.
Most Americans donate money even though they receive no federal tax benefit. Americans gave generously long before the income tax and the charitable tax deduction existed. A large industry of lawyers and accountants has cropped up to help wealthy people lower their tax liabilities through various forms of charitable giving. Sometimes these methods lead to creative accounting and legal gymnastics that can distort or divert people’s choices of how to use their wealth.
These observations provide a few reasons to want an alternative to our federal tax code 501(c)(3) structure. We should ask whether society would be freer in a world without tax exemptions for charitable giving—a world without the stark for-profit/nonprofit legal divide with all its attendant reporting and hoops. Tax code rules that put their thumb on the scale represent social engineering of the kind free people should reject.
Most Americans give generously without thought of return—even with a large welfare state and high taxes. There is something deeply admirable about this kind of generosity that gives without expecting any material benefit in return. Imagine how they would give if the welfare state were trimmed down and their taxes were lower. That’s what George W. Bush’s “compassionate conservatism” should have meant.
