By Jim McCarthy Nov 11, 2010 4 comments

Donating Money for a Tax Write-Off is Like Giving Away a Dollar to Save Fifty Cents

Sometimes, I think people just get confused.

There was a little piece in the WSJ about research on taxes and how they affect wealthy donors to charitable causes.  Here’s the key tidbit:

“The poll of 800 households with $200,000 or more in income and $1 million or more in net worth (excluding primary residences) found that wealthy donors are increasingly sensitive to taxes when it comes to their giving. More than two-thirds said they would decrease their charitable giving if they received zero income-tax deductions for their donations. That is up from less than half in 2007.

Were the estate tax to be permanently repealed, 43% of wealthy households said they would increase their giving.”

The piece also says that the lead reasons for giving are:

“• Being moved by how their gift can make a difference (72%).
• Feeling financially secure (71%).
• Giving to an organization that will use their donation efficiently (71%).
• Supporting the same causes or organizations annually (66%)”

But then there’s confusion about what this means.  People say they’re giving for altruistic reasons, but then they say they’d give less if they didn’t get a tax deduction.  How can this be?

Well, it’s very simple, and it should be obvious to anyone:  when people pay less in tax, they have more to give, and so they do.  Especially the wealthy.

Look at it this way: you’re walking down the street with a pocket full of cash.  You bump into a friend who runs a really outstanding soup kitchen, theatre, church or whatever you like in your town.  You think to yourself how much you’d like to help his organization with a donation.

Then you notice that standing on the corner, blocking your path is a ruffian who will rough you up and take half your money.  Your only choices are to give it to your friend or give half of it to the ruffian.

Many people, especially those who have enough to meet their personal financial needs, are going to give that money to their friend who runs the good organization.  Heck, they might do it anyway, but when you realize that half of it (or more) is going away unless you give, you might as well give.

But would you make a donation in order to get a tax write off? It doesn’t really make any sense.  For every dollar you give away, you get to save, if you’re well off, probably $.50 in taxes.  BUT YOU PAID A DOLLAR FOR THAT SAVINGS!

So the only plausible explanation (and really, it’s quite a simple one) for this data is the following:  people would very much like to give, and do, regardless, but when tax policy makes it so that money you give away is not ALSO taxed by the government, they do it more.

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