Citing worries about wealth inequality, demanding greater public disclosure of donors, and wishing to generate more tax revenue, the progressive Institute for Policy Studies (IPS) released a report calling for a substantial and unnecessary overhaul of charitable giving rules at the federal level. Not only are the recommendations unhelpful, they can damage the ability of groups to aid and advocate on behalf of causes they believe in.
The IPS report is a set of bad policy recommendations based on unsound methodologies. There is already extensive oversight of donations and charity operations without the need for taxing charitable giving and creating a new federal bureaucracy. NTUF has documented in the past how the proceeds from taxing private philanthropy would represent a drop in the bucket for federal revenues, but would significantly hamper private altruism. Furthermore, invasive donor disclosure is dangerous and subject to close judicial review by the federal courts.
The primary driver for this call to action is a worry about “inequality” in the charitable system — the supposed outsized importance of large donations compared to smaller donations. Using data incorrectly, the report argues that fewer people are giving to charity, meaning larger donors have more sway than they used to. But IPS only arrives at this conclusion by skewing the role middle and lower economic status Americans have on charity donations, thus making the impact of larger donors seem greater when the reality is different.
First, the IPS report misreads its own underlying data. The report relies on the biennial Indiana University’s Lilly Family School of Philanthropy survey on charitable giving. The University’s authors disclose the sources of their data, their limitations, and their strengths. While the academics relied on four data sets, IPS reported only on one, the Philanthropy Panel Study (PPS). The PPS differs from the other three studies in including religious giving in its study of charitable giving. As is well researched, religious affiliation and giving are down over the last few decades as the United States generally becomes more secular. The authors of the Indiana University study acknowledge this significant impact on the results of the PPS, but that does not make the Institute for Policy Studies paper.
Second, the IPS report cites the recent drop in tax itemizers incorrectly as evidence that charitable giving has dropped. But the Tax Cuts and Jobs Act (TCJA) nearly doubled the standard deduction with the express goal of reducing the number of itemizers, allowing for a simplified tax code and saving everyone time and money. This was one of the key successes of the TCJA, resulting in nearly two-thirds of taxpayers who previously itemized their taxes switching to taking the standard deduction.
But that means comparing charitable deductions based on itemized filings from before the TCJA to now is a mistake. In reality, the Tax Foundation found that the TCJA didn’t impact charitable giving past 2018 (because some donors front-loaded 2018 giving in 2017 when the marginal tax rate was higher).
After misidentifying the problem, the IPS report follows with bad “solutions.”
In a troublesome call for bigger government, the IPS report calls for new taxes to fund a new federal agency to oversee charitable giving — removing the responsibility from the IRS. The progressive think tank recommends funding the office via excise taxes on foundations. It’s unclear what exactly this new agency would do that is not already covered by federal and state regulators. The IRS oversees charitable giving, particularly for charities that generate tax deductions for their donors, but each state also regulates charities. There are therefore already dozens of enforcement agencies that review charitable giving, plus independent private groups like Guidestar and Charity Navigator. Nevertheless, IPS recommends that philanthropic groups be taxed to pay for a redundant level of federal regulation.
At the federal level, the IRS handles charity reporting and oversight because each donor and charity must file their own tax returns and the IRS is best suited for cross checking numbers to assure compliance with the rules. The IPS report suggests that the IRS should hand over this responsibility to a new agency, creating the need to send tax information to outside groups and increasing the risk of data breaches. The IRS already struggles to keep financial records confidential without adding the need to ship tax returns to an outside agency as another source of abuse.
Beyond a new agency, the IPS report calls for new rules on how foundations are structured. The IPS report calls for changing how foundations are governed, such as requiring independent board members. But already private foundations have more regulations on their activity and closer scrutiny from the IRS than public charities. One of the biggest goals of federal regulation of private foundations is to ensure that the foundations do not operate for the private benefit of the founders or their families. Consequently, rules governing private foundations are stricter, and there are extra penalties for violating rules governing private foundations. But foundations being run by the original founder or their heirs is not a problem. In fact, it helps clarify donor intent and assure that the goals driving the foundation are met, rather than being diverted by mission creep or wayward staff.
Additionally, the IPS report calls for heavy restrictions on Donor Advised Funds (DAFs), which are investment accounts administered by a third party (like a broker) that allow a donor to direct where the money is donated over time. IPS wants to require quick payout of funds and extensive donor disclosure. Quick payout would only pump more money into the nonprofit sector without a chance for clear oversight to ensure funds are used wisely and as promised. Quick payouts would take away that key oversight time.
Donor disclosure — requiring donations to be made in the name of the person who gave to the fund — is even more troublesome. Donor privacy is an important First Amendment right, particularly for those who give to controversial causes. For decades, the Supreme Court has consistently shielded organizational donors and supporters from generalized donor disclosure, and it continued to do so just last year. This is particularly important for advocacy on controversial topics. As the Supreme Court recognized in protecting the NAACP: “[e]ffective advocacy of both public and private points of view, particularly controversial ones, is undeniably enhanced by group association,” because that there is a “vital relationship between freedom to associate and privacy in one’s associations.”
There is also a practical aspect for anonymity in giving to a nonprofit: not wanting to be pestered for more money. Giving to nonprofit organizations often triggers further fundraising efforts for more money from the donor, but if the donor gives via a DAF, they can assure that further requests for money will not happen. Theoretically, that is what the IPS report authors would want: less sway from donors who can give large amounts of money in the ordinary operations of nonprofits. DAFs are a good way to separate the donor and the charity.
The Institute for Policy Studies relies on bad methodology to support unneeded solutions that will harm donors and charities alike. Policymakers should be careful not to be taken in by poorly-considered “solutions” that would reduce the benefits that American philanthropy provides to Americans and the world.