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Founders’ Fortunes and Philanthropy: A History of the U.S. Charitable-Contribution Deduction

  • Nicolas J. Duquette

Abstract

Since 1917, tax filers in the United States who itemize tax deductions have been able to subtract gifts to eligible charities from their taxable income. The deduction is especially valuable to successful entrepreneurs who donate corporate stock. Such philanthropy was seen as a close substitute for government spending until after the mid-twentieth century. In the 1950s and 1960s, high tax rates catalyzed the formation of large foundations from industrial fortunes and precipitated a national debate about the legitimacy of such giving. The midcentury debate preceded increased oversight of charities and foundations and a shift in the way U.S. lawmakers regarded the contribution deduction—from a subsidy by philanthropists of public goods government would otherwise provide to an implicit public cost.

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Footnotes

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The author is grateful for comments from Eric Allen, Ed Kleinbard, Jim Ferris, and two anonymous referees, as well as from session participants at the Policy History Conference and ARNOVA. All errors are the author's.

Footnotes

References

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1 The George W. Bush administration proposed limiting the deduction for high earners to those giving the largest amounts relative to income and using the resulting tax savings to pay for a deduction for all. See Ackerman, Deena and Auten, Gerald, “Floors, Ceilings, and Opening the Door for a Non-Itemizer Deduction,” National Tax Journal 59 (Sept. 2006): 509–30. Proposals from the Obama administration focused on converting the deduction to a flat rate per dollar donated, so there would be no additional subsidy for high earners. See Suzanne Perry, “Obama's Plan to Reduce Charitable Deductions for the Wealthy Draws Criticism,” Chronicle of Philanthropy, Feb. 2009; Alex Daniels, “Obama Budget Again Calls for Limit to Charitable Deduction,” Chronicle of Philanthropy, Feb. 2015; and Cordes, Joseph J., “Re-thinking the Deduction for Charitable Contributions: Evaluating the Effects of Deficit-Reduction Proposals,” National Tax Journal 64 (Dec. 2011): 1001–24.

2 See the call for business historians and economists to learn from each other's methods in Morck, Randall and Yeung, Bernard, “Economics, History, and Causation,” Business History Review 85 (Spring 2011): 3963.

3 Consider, for example, the emphasis on formative life experiences in philanthropic biographies of Rockefeller, John, Carnegie, Andrew, and Mellon, Andrew. Dalzell, Robert F. Jr., The Good Rich and What They Cost Us (New Haven, 2013), chap. 5; Nielsen, Waldemar E., The Big Foundations (New York, 1972), 3132; and Cannadine, David, “Andrew Mellon: Making Money and Giving It Away,” in Great Philanthropists: Wealth and Charity in the Modern World, 1815–1945, ed. Mandler, Peter and Cesarani, David (London, 2017), chap. 9.

4 For a survey of economists’ understanding of the contribution deduction and philanthropy, see Andreoni, James, “Philanthropy,” in Handbook of the Economics of Giving, Altruism and Reciprocity, vol. 2, ed. Kolm, Serge-Cristophe and Ytheir, Jean Mercier (Amsterdam, 2006), chap. 18.

5 Trustees of Dartmouth Coll. v. Woodward, 17 U.S. 4 Wheat. 518 (1819).

6 Hall, Peter Dobkin, “A Historical Overview of Philanthropy, Voluntary Associations, and Nonprofit Organizations in the United States, 1600–2000,” in The Nonprofit Sector: A Research Handbook, ed. Powell, Walter W. and Steinberg, Richard (New Haven, 2006), 3640.

7 Lindert, Peter H. and Williamson, Jeffrey G., Unequal Gains: American Growth and Inequality since 1774 (Princeton, NJ, 2016), 120, fig. 5–4.

8 Carnegie, Andrew, “The Gospel of Wealth,” in The Gospel of Wealth and Other Timely Essays (New York, 1901), 1213.

9 Dalzell, The Good Rich and What They Cost Us, chap. 5.

10 Nielsen, The Big Foundations, chap. 4; Hall, Peter Dobkin, Inventing the Nonprofit Sector and Other Essays on Philanthropy, Voluntarism, and Nonprofit Organizations (Baltimore, 1992), chap. 1.

11 Harvey, Charles, Maclean, Mairi, Gordon, Jillian, and Shaw, Eleanor, “Andrew Carnegie and the Foundations of Contemporary Entrepreneurial Philanthropy,” Business History 53 (2011): 425–50; Maclean, Mairi, Harvey, Charles, and Clegg, Stewart R., “Organization Theory in Business and Management History: Present Status and Future Prospects,” Business History Review 91 (Autumn 2017): 457–81; Schervish, Paul G., “Major Donors, Major Motives: The People and Purpose behind Major Gifts,” New Directions in Philanthropic Fundraising 47 (Spring 2005): 5987.

12 Witte, John F., The Politics and Development of the Federal Income Tax (Madison, WI, 1985).

13 55 Cong. Rec. S6741 (1917).

14 55 Cong. Rec. S6729 (1917).

15 The appendix strives to be comprehensive in noting relevant changes to the charitable-contribution deduction and related areas of tax law. Many of the changes noted are not discussed in the main text of this article.

16 Cited in Brilliant, Eleanor L., Private Charity and Public Inquiry: A History of the Filer and Peterson Commissions (Bloomington, IN, 2000), 21.

17 Quoted in Revenue Code of 1954: Hearings before the Committee on Ways and Means, House of Representatives, 83rd Cong. 162 (1954).

18 Hopkins, Bruce R., The Law of Tax-Exempt Organizations, 9th ed. (Hoboken, NJ, 2007), chaps. 1–2. Homeowners’ associations, to give a counterexample, are generally organized as tax-exempt nonprofit entities, but they are not charities and cannot receive deductible gifts.

19 The max operator denotes the greater of the two (the standard deduction or the sum of all available itemized deductions).

20 The standard deduction is an amount independent of the filer's itemized contribution items; for example, in tax year 2017 married couples filing jointly had a standard deduction of $12,700. It makes sense to claim itemized deductions only if they sum to more than the standard deduction. Because high-income households tend to owe more state income tax and carry larger mortgages, they are much more likely to be itemizers than low- or middle-income households.

21 For example, imagine a high earner paying the top 2016 tax rate of 39.6%. Suppose that person gives $1,000 to charity. The donor then reduces the tax owed by 39.6% × $1,000 = $396. Therefore, the actual cost of making that contribution was $1,000 − $396 = $604, or 60.4% of the value received by the charity.

22 Nor does the receiving charity owe capital gains tax if it liquidates the donated shares, because charities are exempt from corporate income tax.

23 That is, θ ≡ (market value − cost of acquiring the shares)/(market value). For example, if the taxpayer bought some stock at a price of $40 per share and donated it when its value was $100 per share, then ${\rm \theta} = \displaystyle{{100 - 40} \over {100}} = 60{\rm \%} $.

24 To continue the example above, now imagine a taxpayer donates $1,000 worth of stock held in a taxable account that has doubled in nominal value since it was purchased (θ = 0.5). The donation yields $396 in tax savings against ordinary income tax and also avoids $1,000 × 0.5 × 15% = $75 of long-term capital gains tax at the 2016 capital gains tax rate of 15%. The total tax reduction is $471, and the taxpayer loses just $529 in giving the recipient organization $1,000.

25 See the discussions in Peloza, John and Steel, Piers, “The Price Elasticities of Charitable Contributions: A Meta-analysis,” Journal of Public Policy & Marketing 24 (Fall 2005): 260–72; Bakija, Jon and Heim, Bradley, “How Does Charitable Giving Respond to Incentives and Income? New Estimates from Panel Data,” National Tax Journal 64 (June 2011): 615–50; and Duquette, Nicolas J., “Do Tax Incentives Affect Charitable Contributions? Evidence from Public Charities’ Reported Revenues,” Journal of Public Economics 137 (May 2016): 5169.

26 In the public economics literature, wealthy corporate founders are likely overlooked for data reasons: there are not many of them, their anonymized tax returns are indistinguishable from other very-high-income households, and surveying them is impractical.

27 Not all U.S. states have income taxes, and not all state income tax systems have a charitable-contribution deduction. However, some states that are important for the philanthropic sector (including California and New York) do.

It is difficult to characterize the contribution of the estate tax to living donors’ incentives without knowing individuals’ expectations about their time left to live and further appreciation of any shares over that period. However, giving while living is generally preferable to giving at death, because living donors avoid both income and estate taxation on the donated amounts; charitable bequests avoid only the estate tax. See David Joulfaian, “Charitable Giving in Life and at Death,” in Rethinking Estate and Gift Taxation, ed. William G. Gale, James R. Hines Jr., and Joel Slemrod (Washington, DC, 2001), 350–69. Charitable bequests do have the advantage of being deferred until death (leaving donors lifelong control of their property), and there is no limit on the deductibility of charitable bequests from the estate tax base.

28 84 Cong. Rec. 7497–98 (1939).

29 Revenue Act of 1951: Hearings before the Committee on Finance, Senate, 82nd Cong., 1st sess. 1026 (1951).

30 98 Cong. Rec. 6318 (1952).

31 Internal Revenue Code of 1954, §170.

32 Witte, Politics and Development of the Federal Income Tax, 149.

33 100 Cong. Rec. 3461 (1954).

34 100 Cong. Rec. 1027–29 (1954). Specifically, Butler argued that “this provision would rule out this extra benefit from such institutions as orphanages, homes for the aged, and correctional institutions for youth operated under religious auspices. It may very well be that the House of Representatives had a purpose in limiting this extra benefit, but it is difficult to imagine that such worthy institutions as these should not be accorded full benefits of this legislation” (pp. 1027–28). Note that in 1954 there were four male representatives in the House named Smith. The Congressional Record does not note which Mr. Smith was present for this hearing.

35 Duquette, Nicolas J., “Do Share-of-Income Limits on Tax-Deductibility of Charitable Contributions Matter for Charitable Giving?,” Economics Letters 174 (Jan. 2019): 14.

36 Brilliant, Eleanor L., The United Way: Dilemmas of Organized Charity (New York, 1990); Putnam, Robert D., Bowling Alone: The Collapse and Revival of American Community (New York, 2000); Gabrielle Fack and Camille Landais, “Philanthropy, Tax Policy and Tax Cheating: A Long Run Perspective on U.S. Data,” CEPR Conference Volume, May 2012; Duquette, Nicolas J., “Inequality and Philanthropy: High-Income Giving in the United States 1917–2012,” Explorations in Economic History 70 (Oct. 2018): 2541.

37 Odendahl, Teresa, Charity Begins at Home: Generosity and Self-Interest among the Philanthropic Elite (New York, 1990), 63.

38 Baum, Daniel Jay and Stiles, Ned B., “Power Pools: Private Foundations and Public Corporations,” UCLA Law Review 13 (May 1966): 938–64.

39 Chairman's Report to the Select Subcommittee on Small Business, Tax-Exempt Foundations and Charitable Trusts: Their Impact on Our Economy, H.R. Rep., 87th Cong. (Dec. 31, 1962); Chairman's Report to Select Subcommittee on Small Business, Tax-Exempt Foundations and Charitable Trusts: Their Impact on Our Economy, Seventh Installment, H.R. Rep. No. 91-1 (June 30, 1969).

40 Boris, Elisabeth T., “Creation and Growth: A Survey of Private Foundations,” in America's Wealthy and the Future of Foundations, ed. Odendahl, Teresa (New York, 1987), tables 4-6 and 4-12.

41 Hall, Inventing the Nonprofit Sector, 67–70.

42 Chairman's Report, Tax-Exempt Foundations and Charitable Trusts, 1962 and 1969. See also the Wall Street Journal, 23 Aug. 1962, 3, and the New York Times, 23 Aug. 1962, 14.

43 Wall Street Journal, 7 Jan. 1963, 20; Christian Science Monitor, 7 Jan. 1963, 9; Domhoff, G. William, Who Rules America? (Englewood Cliffs, NJ, 1967); Lundberg, Ferdinand, The Rich and the Super-Rich (New York, 1968).

44 Lundberg, The Rich and the Super-Rich, chap. 10.

45 Baum and Stiles, “Power Pools.”

46 Domhoff, Who Rules America?

47 Brilliant, Private Charity and Public Inquiry, 76–86.

48 Brilliant, 76–86.

49 “Ordinary income property” refers to objects that, if retained by the donor, would be used to create ordinary earned income, not capital income. This rule left untouched the additional tax benefit for donating financial securities or collectible artworks.

50 Tax Reform Act of 1969: Hearings before the Committee on Finance, Senate, 91st Cong. 6056 (1969) (statement of Senator Albert Gore Sr. of Tennessee).

51 Brilliant, Private Charity and Public Inquiry, 116–18.

52 Brilliant, 45–46, 127–36; Hall, Peter Dobkin, Inventing the Nonprofit Sector and Other Essays on Philanthropy, Voluntarism, and Nonprofit Organizations (Baltimore, 1992), 7678.

53 Hall, Inventing the Nonprofit Sector, chap. 1.

54 Brilliant, Private Charity and Public Inquiry, 143–67; Smith, David Horton, “A History of ARNOVA,” Nonprofit and Voluntary Sector Quarterly 32 (Sept. 2003): 458–72.

55 The idea of a tax “price” for charitable donations appears to originate from Taussig, Michael K., “Economic Aspects of the Personal Income Tax Treatment of Charitable Contributions,” National Tax Journal 20 (Mar. 1967): 119. The emphasis on whether the tax subsidy induces greater or lesser contributions than foregone tax appears in Feldstein, Martin, “The Income Tax and Charitable Contributions: Part I—Aggregate and Distributional Effects,” National Tax Journal 28 (Mar. 1975): 81100.

56 Feldstein, “The Income Tax and Charitable Contributions: Part I—Aggregate and Distributional Effects”; Feldstein, Martin, “The Income Tax and Charitable Contributions: Part II—The Impact on Religious, Educational and Other Organizations,” National Tax Journal 28 (June 1975): 209–26; Commission on Private Philanthropy and Public Needs, Giving in America: Toward a Stronger Voluntary Sector: Report of the Commission on Private Philanthropy and Public Needs (Washington, DC, 1975); Brilliant, Private Charity and Public Inquiry, 127–67.

57 See the discussion in Bakija, Jon and Heim, Bradley, “How Does Charitable Giving Respond to Incentives and Income? New Estimates from Panel Data,” National Tax Journal 64 (June 2011): 615–50.

58 Brilliant, Private Charity and Public Inquiry, 123.

59 Specifically, taxpayers had to pay unrealized capital gains on donations of stock if they were subject to the alternative minimum tax (AMT). The AMT sets a floor on the income tax owed by high earners who reduce their tax liability “too much” through the use of legitimate deductions. Charitable contributions are deductible from AMT income, but from 1987 to 1992 gifts of stock were subject to capital gains tax. Company founders giving primarily unrealized capital gains would have had no benefit from donations beyond the point where giving was sufficient to trigger AMT liability, effectively ending the tax rationale for large gifts of corporate stock.

60 Odendahl, Charity Begins at Home, 63.

61 Wall Street Journal, 7 July 1982, 4.

62 Salamon, Lester, “Nonprofit Organizations: The Lost Opportunity,” in The Reagan Record: An Assessment of America's Changing Domestic Priorities, ed. Palmer, John L. and Sawhill, Isabel V. (Cambridge, MA, 1984).

63 Poppendieck, Janet, Sweet Charity? Emergency Food and the End of Entitlement (New York, 1998), 92.

64 Ronald Reagan, Oct. 1981, quoted in Salamon, “Nonprofit Organizations: The Lost Opportunity.”

65 Birnbaum, Jeffrey and Murray, Alan, Showdown at Gucci Gulch (New York, 1987), 90.

66 Bekkers, René and Wiepking, Pamala, “A Literature Review of Empirical Studies of Philanthropy: Eight Mechanisms that Drive Charitable Giving,” Nonprofit and Voluntary Sector Quarterly 40 (Sept. 2011): 924–73; Odendahl, Charity Begins at Home; Ostrower, Francie, Why the Wealthy Give (Princeton, NJ, 1995); Schervish, “Major Donors, Major Motives.”

67 Duquette, “Inequality and Philanthropy.”

68 Tax Policy Center, “Impact on the Number of Itemizers of H.R.1, the Tax Cuts and Jobs Act (TCJA), by Expanded Cash Income Level,” simulation, published Jan. 2018, https://www.taxpolicycenter.org/model-estimates/impact-itemized-deductions-tax-cuts-and-jobs-act-jan-2018/t18-0009-impact-tax.

69 Alliance for Charitable Reform, “Universal Charitable Deduction, CHARITY Act Offered as Amendments to Senate Tax Reform Bill,” published 13 Nov. 2017, http://acreform.org/news-release/universal-charitable-deduction-charity-act-offered-amendments-senate-tax-reform-bill/.

70 Duquette, “Do Share-of-Income Limits on Tax-Deductibility of Charitable Contributions Matter for Charitable Giving?”; Tax Cuts and Jobs Act of 2017, Pub. L. No. 115–97, 131 Stat. 2054 (2017).

The author is grateful for comments from Eric Allen, Ed Kleinbard, Jim Ferris, and two anonymous referees, as well as from session participants at the Policy History Conference and ARNOVA. All errors are the author's.

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