Paul L. Caron
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Friday, July 30, 2021

Weekly SSRN Tax Article Review And Roundup: Eyal-Cohen Reviews The Charitable Tax Deduction And Civic Engagement By Hayashi & Hopkins

This week, Mirit Eyal-Cohen (Alabama; Google Scholar) reviews Andrew T. Hayashi (Virginia; Google Scholar) & Justin Hopkins (Virginia; Google Scholar), The Charitable Tax Deduction and Civic Engagement.

Mirit-Cohen (2018)

It’s no wonder the federal income tax deduction of charitable contribution has been central theme in recent political debates. The tax expenditure to the U.S. government from the charitable contribution deduction in 2018 amounted to over $45 billion and projected to exceed $88 million in 2028. Recently, the CARES Act expended this tax benefit permitting taxpayers who take the standard deduction to deduct up to $300 for charitable contributions while increasing the maximum amount of deductible cash contributions for itemizers. Albeit its historical record as a social and economic policy by providing supplemental (sometimes primary) support for welfare and social services through wealth transfers from wealthy and their preferred charities to the poor, Presidents Obama, Trump, and Biden have all proposed limiting the charitable deduction and even abolishing it altogether. The current charitable deduction increases opportunities to influence political representativeness and appears to favor high-income taxpayers (who itemize their deductions) and their chosen charities while remaining unsuccessful in closing the inequity gap (not all 501(c)(3) organizations benefit lower-income households) and the decline of voluntary associations.

In this Article, Hayashi & Hopkins make an original contribution. They claim that now is the time to expand the tax subsidy for charitable giving as we witness a severe decline in civic society engagement such as unions, churches, neighborhood organizations and charities. Hayashi & Hopkins’ theory is that financial giving leads to greater political and civic participation. Charitable giving has a potential to increase opportunities for relationships among individuals of different races and classes and elevate the spirit of cooperation and public mindedness. They provide empirical evidence of such positive externalities through an innovative and neat study that for one is not looking at the effect of charitable contributions on donees as others have, but rather on the donors. Their data is taken from the 2017 U.S. Census Bureau of Labor Statistics (the “Volunteering and Civic Life Supplement accompanying the Current Population Survey). Their proxies for civic engagement (which seem a bit over-inclusive) include the survey questions about how often the respondent spent time with friends, had a conversation or spent time with neighbors, did or received a favor from a neighbor, spent time with people from a different racial or ethnic or cultural background, gathered with neighbors to do something for the neighborhood or community, and whether the respondent belonged to a group or organizations. Their proxies for political engagement include how often the respondent consumed news and discussed political or social issues with friends, family and neighbors or shared their views on the internet, as well as whether they voted in local elections, attended public meetings or contacted elected officials, or participated in a boycott of goods or services because of political values.

Based on that data Hayashi & Hopkins report new evidence on the relationship between charitable contributions and one of the most essential benefits of giving—donors’ increased volunteerism. They find volunteerism to positively relate to both civic and political engagement. The likelihood of volunteering, they demonstrate, rises greatly as income increases with the share of respondents in the highest income brackets approaching 50%. Moreover, higher incomes are associated with greater engagement across all measures of civic and political engagement. That’s not surprising given the fact that as household income increases, there is greater time and resources to be more civically and politically engaged. Nevertheless, it is not clear whether the same correlation applies to in-kind donation of goods and services that help recycle personal property and lower greenhouse gas emissions. It would be interesting if the paper could provide information on the distribution of the latter per household income and whether in-kind (property, services, and goods) donations correlate to volunteerism differently than cash contributions.

Surveying the theory of the charitable contribution deduction Hayashi & Hopkins argue that individuals’ private cost-benefit calculus underestimates the benefits of voluntary association to them and disregards the benefits to others. Thus, tax law, they claim, should be the mechanism that corrects such market failure. Because lower-income households are reported to be the least engaged in their communities and in order to redirect the distributional effects of tax incentives for charitable giving, Hayashi & Hopkins propose an innovative solution— the Community Contribution Credit, a new refundable tax credit equal to 90% of their contributions and capped at $500, for donations to both Section 501(c)(3) charitable organizations (currently eligible to receive tax deductible donation) and Section 501(c)(4) social welfare organizations (currently ineligible to receive deductible contributions). The Credit will be available to all taxpayers (including non-itemizers) with incomes below the national median household income (about $70,000). Hayashi & Hopkins suggest allowing taxpayers to receive the Credit before making the donation to eliminate liquidity problems. Taxpayers will claim the credit on their federal income tax return by indicating the amount of the donation they intend to make in the coming year. If the taxpayer does not follow through on the donation, then the amount of the credit that was improperly claimed will be added to her tax liability for the following year.

The Credit aims to turn low- and middle- income households from clients of charities to donors and empowers them to remedy inequalities in civic and political participation while increasing their own community involvement and drawing them into a volunteering relationship. Hayashi & Hopkins predict that many taxpayers who did not previously donate to charity would donate $500 as they would receive the same amount back. Nevertheless, they admit taxpayers may not feel the same sense of responsibility and ownership of donors that contributed their earned income and thus have a stake in the organization. The cost of the new credit is estimated to be more than the current size of the charitable deduction—if each taxpayer in the bottom 50% of the AGI distribution takes the $500 credit, Hayashi & Hopkins predict the aggregate cost would be about $54 billion. While they are not committed to any particular way of financing the new Credit, they propose reforming the existing incentives for charitable giving as a way of funding it. 

Hayashi & Hopkins do a great job leaving the reader with hope for a brighter future. They reconceptualize their proposed Credit as a public investment in social organizations and civic engagement that will produce economic benefits, reduce social harm, and increase earnings that will offset some of the revenue loss. Moreover, more participation of households in charitable giving can help monitor the quality of nonprofits’ activities and increase the efficiency of the nonprofit sector. Nevertheless, I wonder if the Credit addresses idiosyncratic demographic factors that correlate with civic participation.  Aside from income level, voluntary community associations tend to increase for people who are employed, possess higher educational, regularly go to church, own a house, have parents that regularly volunteered, and maintain social status in society.  Moreover, there are many opportunity costs of engaging in voluntarism. “Free time” is one example of such opportunity cost that is not an endless resource. While Hayashi & Hopkins briefly note financial giving and volunteering are not perfect substitutes, it would be beneficial if the paper could delve into the price elasticity of “free time” for taxpayers across different households’ income.  For example, one is left to wonder whether “free-time” elasticity for low-income taxpayers who suffer more from community life isolation is such that those who are struggling to make a living between several jobs, juggling childcare, and facing food insecurity, will utilize their new “cash back” from the proposed Credit by acquiring “free time” to volunteer and engage in civic and political causes. Hayashi & Hopkins do indicate the relationship between volunteering and engagement is the strongest among the lowest income survey respondents and point to the greatest potential in that group to create growth through encouraging volunteerism. Based on this, I choose to remain optimistic.

Here's the rest of this week's SSRN Tax Roundup:

https://taxprof.typepad.com/taxprof_blog/2021/07/weekly-ssrn-tax-article-review-and-roundup-eyal-cohen-reviews-the-charitable-tax-deduction-and-civic.html

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