Billionaires don’t need charitable tax breaks

Wealth management experts are predicting an increase in charitable giving in response to Biden’s tax plan — and that’s not a good thing. Despite Biden’s aides framing increased charitable giving as a silver-lining of the proposed tax plan, it’s important to call it what it is: tax avoidance. The charitable deduction is not generally thought of as a tax loophole, but for the rich it accounts for most of the difference between adjusted gross income (essentially total income) and taxable income, the amount on which the tax is calculated. Wealthy people will give more to charity in order to lower their effective tax rate.

Still, if charities benefit as well, what’s the problem? It’s that charities will get a boost but at the expense of general public investment.

Charitable deductions add up. It’s estimated that the top 0.1% of households give 1% of their wealth, approximately $120 billion collectively, to charity. This means that if the average charitable deduction tax saving is, say, 50% (and it could be as high as 74%), that we’re essentially taking $60 billion out of the Treasury and letting the rich decide what kind of public investments should be made. Just imagine if that was instead paid to the government — $60 billion more per year to fund early childhood care and education, green jobs, improved infrastructure, and more. Instead, it’s a tax break for billionaires.

Thanks to charitable deductions, the ultra-wealthy — who benefit the most from them — get to dominate philanthropy and decide which art we see in museums, which diseases are studied and which colleges get new dorm rooms. And to make matters worse, rich people’s tax-deductible donations often don’t even make it to nonprofits. Their dollars wind up in private foundations and donor-advised funds that continue to grow tax-free for years without benefitting society. It’s a complete rip-off of the average taxpayer.

People argue that charitable deductions are needed in order to incentivize philanthropic giving. Even if that’s true, there’s no reason we should be allowing that money to sit in private funds or incentivizing primarily the ultra-wealthy to give. If we lowered the cap on charitable deductions for those in the highest tax brackets, we could expand charitable deductions for lower income groups and increase the giving power of the middle class. This would help democratize philanthropy and encourage nonprofits to court the interests, and therefore the more diverse preferences, of a broader range of Americans — not just billionaires.

The sad truth is that the rich will almost always choose personal prosperity over shared prosperity. Even in the face of a global crisis and with the push of an overly generous charitable tax deduction, the rich have grown more outrageously wealthy over the course of the pandemic and yet continue to give an embarrassingly small percentage of their wealth to nonprofits. Amazon founder Jeff Bezos, the poster child for personal prosperity, is soon to be captain of a $500 million yacht. While it’s hard to fathom such excess after seeing what the world has experienced this past year, it’s a good reminder that billionaires will not save us (although his lifeboat must be something to behold!).

America has a major wealth inequality issue, that much is obvious. Where things get tricky is figuring out what to do about it. The Biden administration seems prepared to levy higher taxes on the rich, which is a major piece of the puzzle. And while we wait for government action on taxes, we can also pressure the ultra-wealthy to dig deeper during the pandemic and beyond. The more rich people who make commitments to substantially increase their annual giving, such as through the Crisis Charitable Commitment or Give While You Live campaign, the more shameful it becomes to hoard excessive wealth. While taxing the rich might mean that Bezos would have a little less cash to spend on his toy boat, that’s a fair price to pay for a civilized society.

And if Biden does raise taxes on the wealthy, we need to make sure they’re actually paying them — no more bankrolling billionaire philanthropy at the expense of taxpayers through massive charitable deductions that allow donations to sit unused in private foundations. Incentivizing the rich to avoid paying their fair share of taxes by making donations is not something we, nor the Biden administration, should be touting as a win.

Alan S. Davis is a board member of the Patriotic Millionaires and founder of The Crisis Charitable Commitment, a campaign to greatly increase the flow of charitable dollars to nonprofits.