A Half-Hearted Cheer for Charity by Rich People

I’d like to add what I think is needed nuance to the picture of charitable giving policy sketched by two physicians today in the New York Times. Briefly, the authors argue that the current structure of the charitable contribution deduction provides larger benefits to richer donors. The net result, they say, is that there are less funds available for democratically-chosen projects and more for the whims of the rich.

That is 100% true, worth emphasizing, and yet in many ways exactly the point of the existence of the deduction. The deduction is central to the American vision of government, and probably depends for its political viability, and maybe economic efficiency, on its regressive character.

First, the vision thing. The deduction helps to underwrite private contributions in support of collective goods (more technically, of positive externalities): stuff that, once bought, benefits someone other than the buyer. There’s a natural tendency for people to free ride on the efforts of others in producing collective goods, though there is a deep literature on the methods humans have developed to overcome that tendency. Taxes have proven, in my view, the most effective. Taxes simply compel everyone who can to contribute towards shared goals.

The problems with the taxing mechanism are mostly problems with democracy. A very simple one is that most governments pursue the set of goals that satisfies the preferences of the winning coalition. How can those who prefer more than the coalition wants, or something different, get the collective goods they want most? The deduction helps underwrite these non-majoritarian preferences. In turn, by satisfying the outgroup’s desires, the deduction helps to deepen political losers’ commitments to shared governance, offers experimental evidence of how policy can work, and lots of the other traditional benefits we usually talk about when we talk about decentralized government.

So here’s the problem. From a political economy perspective, these kinds of benefits wouldn’t seem to command much support. They’re long-run structural features that strengthen democracy — kinda like, say, having functioning voting equipment. We’re bad at that as a society. And predictably so, because these are just the kinds of collective goods that we hope to leave to other people to fix.

Though there can be other paths, what most often enables us to deliver long-run collective goods effectively is the deep and committed political buy-in of active interest groups. Enter rich people and the regressivity of the deduction. The modern charitable contribution deduction offers disproportionate benefits to a concentrated and powerful group. And that is, arguably, exactly the source of its long-running political strength.

Some economists, such as the Nobelist Peter Diamond, go further and argue that the deduction’s upside-down structure can be efficient. By giving wealthy donors the ability to reduce their marginal rate while still obtaining public goods in exchange, the deduction may soften the opposition of these top earners to a highly progressive tax system (as well as diminishing their efforts to unproductively minimize taxes).

To be sure, you can have too much of a good thing. To me, one of the most interesting design challenges for the deduction’s supporters is how to trade off the advantage and disadvantages of regressivity. I personally am in support of lower deductions for contributions to charities that do not support economic mobility and opportunity. Organizations should be more answerable to the public for what they do, donations should be more transparent, and we sure shouldn’t allow subsidized and secret donations to seep into politics.

But how much exactly do we need to pay rich donors to act, in effect, as lobbyists for charity’s other beneficiaries? That is a difficult conceptual and empirical problem. We could and likely should ask it about other similar programs, such as the low-income housing tax credit. But today’s op-ed sweeps these questions (and other significant design and data issues) under the rug, and I found that to be a deep disappointment from two people whose views I otherwise regard so highly. Even in a brief op-ed, there was room for more nuance.