It’s fine if the charitable sector shrinks a little

Ray Madoff’s NYT op-ed, entitled “Congress’s Assault on Charities,” has been garnering praise from luminaries like Ben Soskis and Rob Reich, but I don’t really understand why.

If you skimmed the op-ed a little bit too quickly, you could be forgiven for thinking that Madoff is writing mainly about the tax bills in the House and Senate, and how charities will be hurt if and when some kind of big tax cut passes. A lot of the op-ed’s readers will surely add it to their long mental list of “reasons to oppose the tax bill”. But of the three main issues Madoff brings up, only one is directly related to the tax bill. And she ignores one of the biggest ways that the bill, if passed, will hurt charitable donations.

The tax bill certainly isn’t good for charities, even though in the end both the House and Senate decided to keep the charitable tax deduction. For one thing, a lot of very rich people are going to see their taxes cut, and at the margin, the less you pay in taxes, the less incentive you have to try to avoid them through mechanisms like charitable giving.

Then, as Madoff notes, there’s the increase in the standard deduction. The higher the standard deduction, the fewer people who will itemize, and therefore the fewer people who can get any benefit from the charitable deduction. Madoff says that “a recent report by the Lilly Family School of Philanthropy estimates that charities could lose as much as $13 billion in donations if the standard deduction is increased,” but that’s a bit of an exaggeration: the $13 billion is a top-end figure which also includes the effect of lowering the top marginal tax rate. A more realistic estimate would be in the single-digit billions, which is real money, but which also has to be placed in the context of total donations rising by more than $10 billion last year alone, to an all-time high of $390 billion. Charities always want more money than they have, but no one can with a straight face say that the charitable sector in America is suffering.

A bigger problem for charities, and one Madoff doesn’t mention at all, is the prospect of the estate tax being abolished. The estate tax is great for charities: rich people give money away before they die, because they afraid of having to pay the estate tax when they die, and then they give even more money away in their wills, for the same reason.

Certainly many fewer people ever pay the estate tax than itemize their tax returns, but those few people are extremely rich, and are liable to give billions of dollars to charity. At the margin, if they’re nudged away from doing so by a more generous tax code, that’s bad for the charitable sector broadly.

But most of what Madoff talks about has nothing to do with the tax bill – and also has very little bearing on the health and wellbeing of the charitable sector. Madoff spends a lot of time railing against donor-advised funds, a favorite hobby-horse of hers. But there’s no evidence that the rise of DAFs has in any way decreased the flow of funds into charities. Indeed, there’s plenty of evidence that DAFs spend a much higher proportion of their assets every year than foundations do.

At the margin, it’s reasonable to believe that people will give more money to charity if they’re spending out of a DAF than they will if they’re spending out of their personal savings account. So while DAFs are problematic in theory, so far I suspect that they’ve been a net positive for the charitable sector as a whole. As long as that remains the case, it’s a bit of a stretch for Madoff to say that the existence of DAFs means that Congress is preventing charities from continuing to do their work.

Finally, Madoff worries that charities will soon be allowed to – wait for it – have political opinions. She worries that charities might be “pressured by donors” (which, yes, always happens anyway), and that the whole sector would be “polluted” if it enters “the realm of politics”.

This is silly: to a first approximation, all charitable activity is political. Are you funding a charter school? Fighting climate change? Working to eradicate HIV/Aids? Trying to reshape the American criminal justice system? Whatever you’re doing, chances are that there are enormous political forces at play in your world, and that your greatest hope for long-term success is that you manage to persuade a government or two to back your vision.

Even under the current constraints on political speech, the Koch brothers and their fellow travelers have done an astonishing job of using a broad and deep network of right-wing think-tanks and other nonprofit entities to reshape the Republican agenda and, ultimately, radically change civic life in America. One can and should bemoan that activity, but let’s not pretend that charitable organizations have been studiously apolitical up until now.

The big picture here is that Congress is not assaulting charities. (In fact, it should probably assault charities more, by attacking the charitable deduction directly, but that’s another argument.) Many people, including Ray Madoff, simply assume that charities are a Good Thing, that they should be supported by tens of billions of dollars in federal and local tax expenditures, and that (say) it’s better for New York University to pay no tax on its vast property portfolio than it is for the City of New York to be able to collect those property taxes and spend them on all of its millions of citizens.

So maybe it’s worth considering that Madoff is exactly wrong, and that far from assaulting charities, Congress has mollycoddled them and given them a pass for far too long. The charitable sector is enormous, and only ever seems to grow; it has already expanded to include most tertiary education in America and a huge chunk of the health industry, along with many other massive employers in the cultural world.

Look at the big picture: Nothing that Congress has done to date seems to have harmed the charitable sector in the slightest. And if the tax bill does make a small change at the margin, it will be still be tiny in comparison to the growth we’ve seen in the industry as a whole. Frankly, it’s about time that the charitable sector, which has done so well in recent years, gave back a little.

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