Uwe E. Reinhardt is an economics professor at Princeton.



Total “charitable giving” by Americans in 2009 was $303.75 billion, or 2.1 percent of gross domestic product, according to data compiled by Giving USA.

As a percentage of G.D.P, that is much higher than comparable figures for nations that prefer to finance charitable and public-interest activities with tax revenues, rather than through voluntary donations.

As the following chart shows, four-fifths of these charitable donations in the United States were made by individuals, including bequests. Only 4.6 percent was donated by corporations.

Giving USA Foundation

Is this private giving properly called charitable? The word charity evokes images of the better-off in society showing generosity toward the poor and helpless.



As the chart below suggests, a good part of private donations in the United States would be more accurately described as voluntary private financing of civic institutions that benefit all members of society. Museums, educational and religious institutions, public parks and monuments and so on come to mind.

Is supporting such institutions really providing charity?

Giving USA Foundation

Even the word private in “private charitable giving” is not completely accurate. A more accurate term would be “private donations coupled with involuntary, tax-financed public subsidies.”

This point was brought home clearly by Prof. Richard Thaler of the University of Chicago in a recent commentary. He questioned the merits of making charitable donations tax-deductible. It is this tax-deductibility of charitable donations that creates the tax-financed public subsidy.

Professor Thaler’s argument struck a responsive chord in me, because for decades I have invited my students at Princeton to think about this very issue. (The most recent version of my lecture notes on this subject can be found here.)

Suppose that you wished to add $10,000 of purchasing power to the budget of your favorite charity. You would send that charity a check for $10,000.

If charitable giving were not tax-deductible, you would have to sacrifice $10,000 to finance that increase in the charity’s budget.

But if charitable donations were tax-deductible, as they are in the United States, and if you faced a marginal combined rate of, say, 45 percent for federal, state and local income taxes, you would need to sacrifice only $5,500 to enhance the charity’s budget by $10,000.

The other $4,500 would come from fellow taxpayers who might not even know your favorite charity or, if they did, might not much like it. (For more on this, I recommend N. Gregory Mankiw’s recent commentary in The New York Times on “tax expenditures,” as economists call tax preferences such as tax-deductibility of particular forms of spending.)

It follows, then, that your $10,000 charitable donation cannot properly be called private charity, even though it is so reported in official statistics on charitable giving in the United States. Rather, it is a mixture of private sacrifice and tax-financed public subsidies. What is reported as private charitable giving significantly overstates the actual private sacrifice.

And the extent to which other taxpayers must step up to the cashier’s window varies directly with your marginal tax rate faced by the private donor, as the following charts show.

In the first chart, we assume that $10,000 is to be added to the budget of your favorite charity. How much of this donation is tax-financed (in blue) varies with alternative assumed marginal tax rates.

The next chart shows the leverage that different donors, with different marginal tax rates, have in funneling money to their favorite charity. We assume that the donor is willing to bear a net, after-tax sacrifice of $10,000, and the chart shows how other taxpayers are forced to top off the donor’s sacrifice with the public subsidy.

As you can see, very low-income people paying only payroll taxes get hardly any leverage for their donations. Very high-income people in states with high income-tax rates – such as New Jersey and New York – can through the tax code virtually double the money funneled to a charity per dollar of their own sacrifice.

Is that fair? As Professor Thaler said: “Why value the donations of rich people more than those of the poor?”

So two major points are clear:

1. In an era of ever-tighter fiscal pressures, it is reasonable to put the tax-deductibility of private donations to charities or to other civic organizations on the table for debate. This tax preference represents a sizable, hidden, tax-financed public subsidy over whose magnitude and incidence our legislative representatives have no control.

2. If there is to be a tax preference to encourage these private donations, a fairer way would be to replace the current tax deductibility with a tax credit of some percentage of the donation, which would be the same for every donor. Professor Thaler proposes a flat 15 percent, pegging it to the capital-gains tax rate. While so-called private charity would still retain its nonvoluntary public component, this approach would at least grant the same leverage to every private donor.

So, let the debate begin.