Last updated: May 12, 2012 1:28 am

Charity begins with a tax break

According to US logic, if it takes tax breaks to get more money to good causes, so be it

Last month I took my daughters to see the Broadway musical Spider-Man. It was a fantastic show that mesmerised my girls, their grandmother and me. But what happened after the ovations was also striking: the performers stepped forward and appealed to the audience to donate to a charity for Aids’ sufferers – noting that “contributions over $50 are fully tax-deductible”. Anybody in the audience who wanted to spend $500 buying, say, the glasses “worn by Spider-Man in this show… complete with his sweat”, could hand the receipt to their accountant – and offset it against their 2012 tax bill.

Welcome to a peculiar cultural kink of the US economy – and one that might generate more debate in the next few years. In recent weeks, millions of Americans have been filing their tax returns to comply with the annual deadline. And as part of that, many have also been calculating the deductions they can claim as a result of their charitable donations.

To Americans, this system is so deeply ingrained that it is rarely questioned, or even discussed. Almost every month in New York, I am invited to a swanky charity dinner which asks people to pay several hundred dollars to buy a seat – and stipulates clearly that this can be offset against tax. It is common for Broadway shows, such as Spider-Man, to include a tax-deductible charitable appeal. Indeed, planned philanthropy – or “philanthrocapitalism” as British authors Matthew Bishop and Michael Green dub it – is so deeply embedded in New York culture that when I rented an apartment in Manhattan, I was asked to submit an essay on my “philanthropic activities” as part of the vetting process.

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Gillian Tett

But to non-Americans – including, I dare say, tourists watching Spider-Man– these practices can come as something of a shock. To be sure, plenty of other countries give some tax breaks for charity; even China got in on the act three years ago, in a limited way. And some are even more generous with incentives. In Canada, for example, charity donations worth up to 75 per cent of income are tax-deductible; in the US it is “only” 50 per cent. But what makes charitable giving so striking in America is the brazen way that self-interest (ie tax breaks) is entwined with philanthropy. This makes many Europeans and Asians wince. In much of Europe, “charity” is instinctively seen as something which has a moral value, not a game played with accountants. Indeed, in a place such as Sweden, the whole concept of private philanthropy, let alone tax breaks, evokes unease; voters think that it should be the state – not the ultra-wealthy – that provides aid to the disadvantaged.

My American friends insist that these European prejudices miss the point. After all, they argue, humans are economic animals that respond to incentives, be they capitalist or anything else. If it takes tax breaks to get more money flowing to good causes, so be it. And most Republicans (and a few Democrats) also insist that it is better if the private sector, not governments, helps the poor. What’s more, “philanthrocapitalism” is a huge operation these days, and often much better run than the state.

But, as the fiscal problems mount, a few maverick voices are starting to question these assumptions. Simon Johnson and James Kwak, two liberal economists, recently wrote a thought-provoking book about America’s debt burden, White House Burning. They calculate that in 2012 the federal tax break from charitable donations was about $53bn. “This tax deduction is occasionally defended as a way of patching our meagre social safety net, but homeless shelters and soup kitchens compete for donations with the Metropolitan Opera, Harvard University and even politically orientated think tanks,” they write. “In effect the government spends $53bn on non-profit organisations – but lets rich people... decide who gets the money.” They argue it is time to trim the tax break as part of a plan to cut American debt, and suggest that, in future, donors should only get tax breaks when they give more than 2 per cent of gross income.

But such views are not popular, let alone mainstream. On the contrary, most of my American friends think that there should be more – not fewer – incentives for philanthropy. As Yale professor Robert Shiller argues, in a country that is wary of the state – and facing rising inequality – charity is essential to reduce social strains. Indeed, he would like to see the pool of gifts that qualify for tax breaks expanded to include “charity” for family and friends – and additional tax breaks offered for the most worthy causes as “part of our plan to deal with even worse income inequality”. In reality, neither of these proposals are likely to fly anytime soon; with an election looming, tax reform is on ice right now. But as the fiscal pressures rise, these issues could get more emotive. Particularly in a country where income inequality has risen – and only a minority of Americans are able to afford the sky-high price of a ticket to a Broadway show.

gillian.tett@ft.com

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