Community service has always played a big role in my life. While growing up, my parents were both pastors and deeply involved in non-profit work. Giving was just something that was expected; it was part of our way of life. As an adult, I have carried the values my mom and dad instilled in us kids, and continue this legacy with my own involvement in non-profits – both professionally and personally.
When The Tax Cut and Jobs Act was being hotly debated in late 2017, the proposed restructuring of the charitable tax deduction was a topic that caused me a good amount of worry. I knew it would affect so many of my friends and their causes, as well as the causes to which my family and I are committed. It wasn’t just limited to the people I know and care about – it’s much bigger than that. It would affect the impact of giving everywhere.
Then the bill passed into law. Some of my colleagues in the non-profit world were in denial. “People give out of the goodness of their heart, whether there’s a tax benefit or not,” they said, even though the increase in the standard deduction no longer provides a direct incentive for those who do not itemize to give to charitable causes.
Let’s break this down. Pre-2018, if you took the standard deduction, you still received a deduction for any charitable donations you made. After the change in tax law, if you decide to take the standard deduction, you no longer qualify to get a tax benefit for your charitable contributions.
The government’s argument is that by cutting taxes, people will have more disposable income, and that will have the effect of allowing them to give potentially even more to the causes they support. (The proof is in the numbers, so stay tuned for more on this next year.)
While I do not deny that people are essentially good, as a financial professional, I am also keenly aware of financial motivators. Economists propose, and studies support that charitable giving decisions are quite responsive to incentives.
But not all incentives are created equally. If you know that you will get a tax deduction when you make a charitable donation, you may make a certain size donation. Now let’s say you no longer get a tax deduction. You just happen to have extra cash and you still have a cause you support, but now will the donation you make be the same as the one you would have had there been a quantifiable return for you? Or might you say: “Well I can give it to somebody else or I can keep it myself, what should I do? Perhaps, I’ll keep it for myself now.”
The truth is, Americans are among the most generous in the world. A 2016 report by the Charities Aid Foundation (CAF) listed the United States, New Zealand and Canada as having the highest rate of charitable donations based on Gross Domestic Product (GDP). Individual Americans averaged donations of 1.44% of GDP, versus 0.79% in New Zealand, 0.77% in Canada and 0.54% in the United Kingdom.
The same CAF study that found that Americans were the most (quantifiably) generous citizens in the world, also looked at the impact of taxation on giving, and made an interesting conclusion. According to an article in The Independent, Adam Pickering, international policy manager at CAF, stated: “Across the 24 nations we studied, we found no significant link between government spending, income or corporation tax and the proportion of GDP donated by individuals.” He added: “This suggests the relationship between the amount of taxes people pay and the amount they give to charity is not as clear cut as some may have thought. The factors which motivate people to give, and influence how much they give, are incredibly complex.”
Bottom line? There seem to be no clear answers in this debate. Each camp can find data to support its argument. As far as I’m concerned, I DO believe in the best in people, AND I have to admit to you, the finance guy in me is quite anxious to see what happens.
So, do YOU give for the deduction, or because it feels good? Maybe it’s a little bit of both. How will the change in tax law affect your giving this year and beyond?
I look forward to the conversation.
Jim Bode is Managing Partner at Beck Bode Wealth Management.