The Case for Removing Charitable Deductions

Total charitable contributions have seen a steady rise over the past few decades, minus a couple years when the economy tanked.¹ Yet over the last couple of decades, the percentage of households giving to charity has been in decline and the median amount given has been at best stagnant (see graph below). Given these facts and some simple algebra, we can figure out that the reason charitable contributions have gone up is because the wealthy are giving more. Though this might not seem bad at first blush (after all isn’t it better that the wealthy have a sense of noblesse oblige?), the picture appears less rosy when one realizes that American tax dollars are being used to fund the status jockeying of the elite. Let’s back up a little.

https://nonprofitquarterly.org/total-household-growth-decline-small-medium-donors/

Charitable contributions are tax-deductible, so tax dollars that would otherwise go to the government don’t. These tax deductions almost solely benefit the wealthy because the lower and middle classes rarely give enough to forgo the standard deduction in favor of itemizing deductions. 21% of households itemized their charitable deductions in 2017 and with the rise in the standard deduction, that percentage is expected to fall to just 9% in 2018.² Therefore, the vast majority of households that make charitable contributions do not benefit in any way when it comes to their taxes and those benefits accrue instead to those who least need it, i.e. the wealthiest individuals.

Even if you are not appalled by the unfairness that the wealthiest are the sole beneficiaries of these tax benefits, you should still be concerned because of the tax revenues that the government misses out on, tax dollars that would have been spent on the American people. Whatever your feelings are about the size of the government, at least it is ultimately accountable to the electorate. If we are concerned about how it is spending our tax dollars, we can elect representatives that change the situation. However, we have no control of the whims of the elite; they can choose whichever charity they want to bless with their money.

Maybe you’re still not convinced. After all, isn’t it still better that the rich give to charity despite being subsidized by tax dollars? Well, no, because the charities that they give to might not be entirely legit and can simply be a way to park money or evade taxes.³ ⁴ There are also issues with perfectly legal methods of charitable donations such as appraising the value of what was given. Consider a simplified hypothetical example. I bought a Picasso two years ago for $1 million and am now considering donating it to a museum for a tax write-off. I hire three appraisers and they come back with values of $2 million, $3 million and $5 million respectively for the painting. Of course, I go with the highest valuation and write-off $5 million on my taxes, but maybe on the open market, the value of the painting would be only $2 million. Had I sold it on the open market, I would’ve made $1 million in profit on the sale, $720k after taxes. But, if I give it to the museum, I can deduct $5 million off of my income which is worth $1.85 million (37% of $5 million), so I come out ahead more than a million dollars due to my charitable donation. The museum does not care because they ultimately still receive a valuable piece of art; the only party that loses is us ordinary taxpayers.

“Okay,” you say, still unconvinced, “what about those who do not cheat the system by avoiding taxes and value their charitable contributions in the most morally-praiseworthy manner? Should we not still encourage those people to give by giving them tax breaks?” Again, my answer would be no, because we can’t affect the organizations they give to. Studies find that the wealthy give most to museums and universities (you know, places that are really strapped for cash).⁵ Why should we be subsidizing Phil Knight’s $400 million donation to Stanford, an institution that boasts a $26.5 billion endowment?⁶ Phil Knight would almost certainly have given a similar amount even if charitable donations were not tax-deductible. After all, by donating such an amount, he can signal his generosity and have his name and legacy forever plastered on Stanford’s buildings. I’m not saying that his donation should be condemned; in fact I think it should be praised, even though I do not think Stanford needs the money. All I’m saying is that we should not subsidize his donation especially as it is a donation that would’ve happened anyways. The same applies to those who give vast sums to museums like the Met for seats on the board or other symbols of their status.

Even the most ethically run, praiseworthy donations such as the creation of the Bill and Melinda Gates Foundation should not benefit from tax deductions. The foundation’s initiatives are mostly for countries outside the U.S., which is not a problem, except for the fact that they’re dollars that otherwise would have gone to the U.S. government. If the American people decide that we want to spend those dollars abroad, that is our prerogative, but right now we have no say what the Gates Foundation does with our tax dollars. And again, just as with Phil Knight’s donation to Stanford, Bill and Melinda Gates would almost certainly have created the foundation even without the tax benefits. A cynical person might say it is Bill Gates trying to secure his legacy or to cleanse his conscience of his business misdeeds. I think that may be a small part of it, but I think he mostly just wants to do good for the world. I want to reiterate, what he and other wealthy philanthropists are doing is laudable; in fact, they’re probably better people than me, as I have not given anything to charity. I’m very grateful and happy that the Gates are choosing to spend their fortune in such an exemplary way and I highly encourage other wealthy individuals to do the same. Just please do it after paying taxes first.

Photo by Shiva Smyth from Pexels

[1] https://www.philanthropyroundtable.org/almanac/statistics/u.s.-generosity
[2] https://www.taxpolicycenter.org/publications/effects-tax-cuts-and-jobs-act-preliminary-analysis/full
[3] https://www.bloomberg.com/news/articles/2018-10-03/the-super-rich-are-stockpiling-wealth-in-black-box-charities
[4] https://www.oecd.org/tax/exchange-of-tax-information/42232037.pdf
[5] https://www.taxpolicycenter.org/publications/effects-tax-cuts-and-jobs-act-preliminary-analysis/full
[6] https://facts.stanford.edu/administration/finances/

The Two Kings and the Two Labyrinths — My Thoughts

This short story is Borges’s shortest and I highly recommend reading it; it’ll only take a minute or two. For those too lazy, the summary is that one king has his people construct a labyrinth, one so sophisticated that not even the smartest person can escape from it. Upon its completion, he traps another king in it. The trapped king eventually escapes after praying to God, gathers his army, and conquers the land of the first king, capturing the king in the process to bring him to said labyrinth. The labyrinth has no walls, no doors, and no stairs. It is simply a vast desert. Though there is nothing impeding him, the first king is unable to escape this “labyrinth” and dies of thirst and hunger.

Photo by Tom Fisk from Pexels

The deep complexity of something that appears so simple is my ultimate takeaway from the story. Examples related to the theme abound in the world around us. A single rose or a sunset by the water are both so ordinary yet so breathtakingly beautiful. Some of our greatest moments of joy come from the simplest things, such as the small favor a friend did for you when you were going through a difficult period, or that time you and your closest friends got together for a meal and drinks and just talked for hours. And for most people, the most difficult job is managing and influencing other people instead of complex analytical work. Telling people what to do seems simple enough but actually doing so in a way that gets them motivated to do the job and to do it meticulously can be incredibly difficult. It’s why there are so many business books written about how to lead or influence people, and it’s why those who can do so are very well compensated. The story of the two kings itself is yet another example of the theme. It’s so incredibly short and easy to read yet we we can find deeper meaning in it the more we think about it.

Paley’s Misinformed Watchmaker Analogy

Paley, in his 1802 book Natural Theology, provides his famous, elegant watchmaker analogy that argues for an intelligent designer of living things. The gist of the quote is that if one comes upon a stone, one might assume that it had always been there, formed by pure randomness, but if one stumbles on a watch, one would not make the same assumption. One would instead assume that there was an intelligent designer who purposefully created it. Quote below for those interested:

“In crossing a heath, suppose I pitched my foot against a stone, and were asked how the stone came to be there; I might possibly answer, that, for anything I knew to the contrary, it had lain there forever: nor would it perhaps be very easy to show the absurdity of this answer. But suppose I had found a watch upon the ground, and it should be inquired how the watch happened to be in that place; I should hardly think of the answer I had before given, that for anything I knew, the watch might have always been there. … There must have existed, at some time, and at some place or other, an artificer or artificers, who formed [the watch] for the purpose which we find it actually to answer; who comprehended its construction, and designed its use. … Every indication of contrivance, every manifestation of design, which existed in the watch, exists in the works of nature; with the difference, on the side of nature, of being greater or more, and that in a degree which exceeds all computation.”¹

Therefore, because a watch, in all its complexity, must have a designer, living creatures must also have one, with God filling the shoes of the watchmaker. Over the years, the analogy has been repeatedly used as an argument against evolution, though whether Paley would have denied evolution himself is up in the air as he died in 1805.

Photo by Felix Mittermeier from Pexels

The analogy fails as an argument for an intelligent designer because though that specific watch may have been designed and created by one man, the watch as a concept was created by countless humans over many centuries. In fact, thinking about the watch from that perspective, the watchmaker analogy is actually a great analogy for evolution. In the same way that living creatures today originated from prokaryotes that became eukaryotes, mechanical watches originated from sundials and water clocks. There was not one top-down designer of the watch because the watch was invented by humanity as a whole. The same applies to the various components that make up the watch or the economy that provides the supply chain for the creation of watches. Nobody set out to design those systems; they naturally arose from the bottom up.

Watches are also just as prone to the forces of natural selection as living organisms. Water clocks and sundials were inferior to the mechanical watch as a method of telling time and became obsolete in the same way that a creature that cannot adapt to a changing environment will become extinct. Funny enough, in our time, even the mechanical watch is obsolete as a time-keeping device and is instead used much more often as a fashion statement or status symbol. Paley assumed that the purpose of the watch was to tell time but it is clear that watches, for the most part, do not serve such a purpose anymore. Did anybody design that change in the watch’s purpose? No, it was just an evolution in culture.

Of course, understanding Paley’s analogy as one in favor of evolution does not solve the most interesting question: the ultimate origin of life. If living creatures came from prokaryotes and prokaryotes came from a confluence of events after the Big Bang, then where did the Big Bang come from? If all of that was created by an intelligent designer, then who designed the designer?We’ll probably never know, but what we do know is that the watch did not come from one watchmaker.

[1] https://en.wikipedia.org/wiki/Watchmaker_analogy