Research Paper: Does Tax Policy Influence Philanthropic Behavior?

Running head: DOES TAX POLICY INFLUENCE PHILANTHROPIC BEHAVIOR?

Does Tax Policy Influence Philanthropic Behavior Toward America’s Poverty-Fighting Nonprofits?

Derek A. Floyd University of San Diego

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DOES TAX POLICY INFLUENCE PHILANTHROPIC BEHAVIOR?

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Abstract This paper explores Reich’s (2005) article examining the failure of American philanthropy in serving the needs of the poor, and his proposal to redistribute tax breaks so that greater benefit is given to donors who contribute to poverty-fighting nonprofits. Are tax incentives alone the primary motivator for philanthropic behavior, or are other factors involved? Experts in philanthropy suggest that giving is based on shared values (Grace, 1997), and recent research supported this by showing that, relative to wealthy people in a higher social class, people in a lower class with fewer resources were more charitable to people in poverty because they were better able to relate to their situation (Piff, Kraus, Côté, Cheng, & Keltner, 2010). These findings suggest that empathy and compassion, rather than higher tax incentives, are greater motivators for philanthropic behavior.

Keywords: poverty, tax policy, philanthropy, donor motivation, compassion

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Does Tax Policy Influence Philanthropic Behavior Toward America’s Poverty-Fighting Nonprofits?

The most recent census data shows that the gap between rich and poor in the United States continued to grow in the past decade and the number of Americans living in poverty reached the highest level in over fifty years (Avernise, 2011). With more Americans struggling to provide basic human needs (e.g. food, shelter, healthcare) for themselves and their families, should government institute “a targeted tax credit to individuals who make donations that spend 75 percent of their budget on direct services to the very poor” (Reich, 2005)? Are individuals’ philanthropic behaviors motivated by tax incentives alone and thus by increasing the charitable deduction for donations given to nonprofits that fight poverty, would more wealthy Americans give to help the poor? I disagree with Reich’s (2005) recommendation because research suggests that people give to nonprofits based on shared values (Grace, 1997) and compassion (Piff et al., 2010); increased tax benefits alone will not inspire wealthy individuals to give to causes to which they do not relate.

But is it the responsibility of wealthy Americans to care for the poor, as Reich’s (2005) article suggests? “Government has a responsibility to ensure that the most basic needs of vulnerable populations are met or that those individuals are enabled to care for themselves” (Independent Sector, 2011, p. 7). Redistributing tax breaks to give more incentive to donors who contribute to poverty-fighting organizations shifts the burden of responsibility and accountability from government to individuals. While charitable contributions by individuals modestly increased in 2010 in almost all areas of the nonprofit sector (e.g. education, health, arts and culture, etc.), donations to human service organizations actually decreased when adjusted for inflation (Giving USA Foundation, 2011, pp. 1-2, 13). “The lack of an increase in giving to

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these organizations in 2010 may reflect a change in donor priorities in 2010 given the recovering economy” (Giving USA Foundation, 2011, p. 13). In better economic times, wealthy Americans give less to poverty-fighting organizations.

Reich (2005) suggests that philanthropy has failed to serve the poor and government policies regulating charity are partly responsible. His recommendation to redistribute charitable tax deductions to favor poverty-fighting organizations makes one questionable assumption: tax incentive is the primary driver for philanthropic activities. Tax benefit may certainly be one determining factor in Americans’ charitable giving decisions, however experts from the Center on Philanthropy at Indiana University offer a much broader perspective. “People do not engage in philanthropic community activities on behalf of organizations whose values they do not share (Grace, 1997, p. 3).” An important question to ask, and one that Reich (2005) overlooks, is this: do wealthy Americans in a higher social class share values with those in poverty and the organizations that serve them? Reich’s (2005) proposal assumes that wealthy Americans will give more to poverty-fighting nonprofits if they receive a higher tax break, irrespective of whether or not they share values with the recipients of their contributions. Recent research, however, suggests otherwise (Piff et al., 2010).

In Piff et al.’s (2010) study, the authors examined whether an individual’s social class and financial resources contributed to their level of prosocial behavior (i.e. generosity, charitable, trusting, and helpful). One might expect that individuals in a higher social class who have more resources would tend to give more than those in a lower social class with fewer resources. “The authors hypothesized, by contrast, that lower class individuals orient to the welfare of others as a means to adapt to their more hostile environments and that this orientation gives rise to greater

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prosocial behavior” (Piff et al., 2010, p. 771). What the authors found supported their hypothesis: Relative to upper class people, lower class people exhibited more generosity, more support for charity, more trust behavior toward a stranger, and more helping behavior toward a person in distress. Despite their reduced resources and subordinate rank, lower class individuals are more willing than their upper class counterparts to increase another’s welfare, even when doing so is costly to the self. (p. 780) Simply put, individuals in a lower social class with fewer resources acted more compassionately toward those in poverty due to shared values and their ability to better empathize.

What does this mean for Reich’s (2005) recommendation for a targeted charitable tax redistribution with greater benefit going to donors who contribute to poverty-fighting nonprofits?

Based on current data, (Avernise, 2011; Piff et al., 2010), the growing divide between rich and poor in this country may not only manifest as a deepening of inequality of class and wealth, but also of compassion. Should government policy place responsibility for taking care of America’s poor into the hands − and hearts − of wealthy individuals by giving them a higher tax break for contributing to poverty-fighting causes, and more importantly, will this result in more resources flowing from the rich to help the poor? The work of Piff et al. (2010) suggest perhaps not.

The broader goal of Reich’s (2005) recommendation for a targeted tax deduction was to pursue greater equality between rich and poor. It would only be successful to the extent to which tax benefit is the primary determining factor in Americans’ philanthropic behavior. Other factors (e.g. shared values and compassion) appear to have greater influence over individuals’ motivations for giving (Grace, 1997; Piff et al., 2010). Perhaps an alternative policy change

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recommended by Reich and others would be more successful (Reich, 2005; Our Fiscal Security, 2010).

Current policy only rewards taxpayers who itemize their deductions on their annual returns for making charitable contributions (Internal Revenue Service, 2011). “These tax code preferences provide no benefit to the majority of taxpayers, predominantly lower-income filers, who take the standard deduction” (Our Fiscal Security, 2010). Changing the policy to allow nonitemizers a credit for their charitable contributions “would be of greatest value to lowerincome people (Reich, 2005, p. 33)” and would allow millions more Americans to receive tax benefit for their donations (Our Fiscal Security, 2010); specifically, millions more Americans that would be more willing to give to people in poverty (Piff et al., 2010). If government must rely on tax incentives for individuals to provide support for the poor, then perhaps our public policy toward poverty-fighting organizations would be better served by a broader understanding of philanthropic behavior, one based in shared values and rooted in compassion.

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References Avernise, S. (2011, September 13). Soaring poverty casts spotlight on ‘lost decade’. The New York Times. Retrieved from http://www.nytimes.com/2011/09/14/us/14census.html DeNavas-Walt, Carmen, Bernadette D. Proctor, and Jessica C. Smith, U.S. Census Bureau, Current Population Reports, P60-239, Income, Poverty, and Health Insurance Coverage in the United States: 2010, U.S. Government Printing Office, Washington, DC, 2011 Giving USA Foundation (2011). Giving USA 2011: The Annual Report on Philanthropy for the Year 2010. Retrieved from http://www.givingusareports.org/free.php Grace, K. S. (1997). Beyond Fund Raising: New Strategies for Nonprofit Innovation and Investment. New York, NY: John Wiley & Sons, Inc. Independent Sector. (2011, April 1). Roles of the Nonprofit and Philanthropic Community.

Retrieved from http://www.independentsector.org/our_sector Internal Revenue Service. (2011). Charitable contributions (Publication 526, Cat. No. 15050A).

Washington, DC: Government Printing Office.

Our Fiscal Security. (2010, November 29). Investing in America’s Economy: A Budget Blueprint for Economic Recovery and Fiscal Responsibility. Retreived from http://www.ourfiscalsecurity.org/fiscal-blueprint/ Piff, P. K., Kraus, M. W., Côté, S., Cheng, B., & Keltner, D. (2010). Having Less, Giving More: The Influence of Social Class on Prosocial Behavior. Journal of Personality & Social Psychology, 99(5), 771-784. doi:10.1037/a0020092 Reich, R. (2005). A FAILURE of PHILANTHROPY: American charity shortchanges the poor, and public policy is partly to blame. Stanford Social Innovation Review, 3(4), 24-33.

Retrieved from EBSCOhost.