So, a buddy and I were at the bar on Saturday night arguing about how to improve the federal tax code to better direct charitable giving (nerd alert!). We came up with a scheme that I’d love your feedback on.
Currently, people receive a dollar-for-dollar tax deduction for their gifts to 501(c)3 nonprofits. That’s great and all, but it’s essentially a statement from the federal government that says, “we don’t particularly care what you do with your charitable giving, as long as the IRS has designated an organization as tax-exempt.” And certainly there are some good aspects to that.
But different causes are more important at different times, right? One example that comes to mind is New Orleans charities after Katrina or the tsunami relief efforts in Indonesia. And sure, we all were very generous immediately afterwards, but attentions shift and we forget that the rebuilding efforts take many years. So, how do you direct money there when popular focus drifts?
Variable tax deductions. Instead of dollar for dollar, some causes would get $1.50 on the dollar. This is also an interesting compromise for nonprofit sectors like the arts, where there are several critics who think that the arts shouldn’t get the same kind of tax advantage as things that aren’t so socially beneficial to support (i.e. – you don’t get as much status from it) like homelessness or food banks; maybe some large, well-endowed (endowmented?) organizations only get $.50 on the dollar.
The biggest problem would be arbitration of this rate. Is there some bureaucrat in the IRS who gets to say that saving endangered species get $1.37 per dollar in donation, but mentoring of inner city kids is $.93? You could probably build some sort of panel of experts, but there would inevitably be controversy and lobbying for this cause or that. But maybe you compensate by rotating it annually based on the state of the economy and a formula which includes the relative support of these causes by the private sector.
It’s an interesting idea, and I’d love to get some thoughts from folks on how to improve it.