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The Vision Project

How to Spread the Wealth

 Our tax system is supposed to encourage the flow of dollars from the private sector to nonprofits, but current rules are not well-suited to their purpose.


Editor’s Note: In this BC Law Magazine “Vision Project” series, we are engaged in a lengthy discussion with Boston College Law School faculty about where the Covid-19 pandemic and its attendant medical, economic, racial, and political consequences may lead us. As New York Times op-ed columnist Timothy Egan so eloquently put it recently, “Every crisis opens a course to the unknown. In an eye-blink, the impossible becomes possible. History in a sprint can mean a dark, lasting turn for the worse, or a new day of enlightened public policy.” There are warnings and worries in these professors’ views, but there are also farsighted ideas and strategies for crafting a better future, a more just society, and a world in which each and every human being is equal under the law.


Professor Madoff’s areas of expertise include philanthropy policy, wealth inequality and taxes, estate planning, wills and trusts and rights of the dead. She is Co-founder and Director of the Boston College Law School Forum on Philanthropy and the Public Good, a non-partisan think tank, and author of Immortality and the Law: The Rising Power of the American Dead (Yale). A frequent contributor to the opinion pages of the New York Times, she has also published in the Washington PostWall Street Journal, LA Times, and Chronicle of Philanthropy.

portrait of Ray Madoff for book cover

What has the coronavirus pandemic revealed about the strengths and weaknesses of our philanthropic and nonprofit sectors and the laws that sustain them? The coronavirus crisis has served as a stark reminder of the essential role that charitable nonprofits play in Americans’ lives. Think about the centrality of nonprofits in the most pressing issues around the coronavirus. We count on hospitals to treat the sick, research institutions to help find vaccines and cures, and food pantries and shelters to meet the growing needs of the hungry and homeless suffering under the economic devastation caused by the pandemic. Moreover, as we sheltered in place we longed to return —in real life and not just virtually—to our universities, places of worship, museums, and other charitable nonprofits that provide so much richness and meaning to our lives.

Nonprofits are also playing a central role in the reignited fight for justice and civil rights for black Americans that is taking place across the country. As we seek to promote change, it is often through nonprofit organizations that we join together to serve underserved communities and work to effectuate fundamental structural change.

Yet, even as we have become acutely aware of the unique value of nonprofits, these essential organizations are imperiled as the financial fallout from the pandemic threatens their ability to do their work and, in some cases, their very existence. Most nonprofits depend on charitable donations to survive. Our tax system is supposed to encourage the flow of dollars from the private sector to nonprofits, but the rules are not well-suited to their purpose.

The first problem is that not all taxpayers are encouraged to engage in charitable giving. The reason for this is that the charitable tax benefits are generally only available to people who itemize their deductions (that is, people whose deductions are greater than roughly $12,000 per person). Since less than 10 percent of Americans itemize their deductions, more than 90 percent of Americans are given no incentive to encourage their charitable giving. The recent CARES Act tried to address this by providing a short-term deduction for up to $300 for nonitemizers, but since many Americans already make charitable donations in this amount, this provision is unlikely to spur significant additional funds to nonprofits.

The other problem with our rules is one that applies to donations from wealthiest Americans. This group receives significant tax benefits for their charitable giving. Indeed, a well-planned charitable gift, can save a donor up to 74 percent of the value of the gift in income, capital gains, and estate and gift taxes. That means, that a $10 million charitable donation can end up saving $7.4 million in taxes, only costing the donor $2.6 million after tax savings are taken into account.

There are two problems with this. First, if we look at this on a macro level, we see that this widely disparate treatment serves to further empower the wealthiest Americans since their gift is matched by the government on a 3:1 basis, while most Americans receive no benefits at all for their charitable giving.

There is another, even more significant problem, from our current charitable tax rules. That is, that people need not give their money to working charities in order to receive these benefits. Taxpayers can get the same benefits, by making donations to private foundations and donor-advised funds. There are two popular forms of giving in which donors receive up-front tax benefits for setting funds aside for future charitable spending. There is currently over a trillion dollars set aside in these entities.

The problem is that current rules do nothing to ensure that this charitable spending will ever occur. Donor-advised funds (DAFs) are subject to no payout rules, and while private foundations are required to spend 5 percent of their assets a year, this payout rule can be satisfied by paying salaries to family members and by making contributions to donor-advised funds, which have no further payout rules. So now we have the case where the government has made a significant contribution in terms of foregone taxes to the creation of these entities, with no assurances that there will ever be any benefit to the public.

What short- and long-term opportunities do you see arising from the pandemic for improving how we define and deliver economic justice? There is growing awareness that more needs to be done to reform our tax rules.

One small step has already been taken in the CARES Act by providing a charitable deduction that allows nonitemizers to deduct up to $300 of charitable donations made in 2020. Although the $300 cap is problematic, the provision did have some good aspects, most notably, it explicitly excluded contributions to private foundations and DAFs (providing explicit Congressional recognition of the importance of getting money to working charities) and was limited to contributions of cash, as opposed to property.

In addition, there are other proposals that are currently being made to Congress to try to increase the flow of money to working charities. One group has proposed an Emergency Charity Stimulus bill that would require private foundations and donor-advised funds to distribute more than 10 percent of their assets each year for the next three years.

I have been working with a group of philanthropists and foundation leaders who are interested in promoting more long-term reform to these rules. This is a very exciting development as this type of leadership will be essential to bringing about change.

What is your vision for a post-pandemic world? What policies and plans would you recommend to guide us toward building and sustaining a stronger and more just society? I would like to see a complete overhaul of the tax rules governing charitable donations to ensure that there is a closer connection between tax benefits to donors and benefits to the public. In addition, I would like to see more equity in the allocation of the tax benefits for charitable giving so that all American’s voices for good can be empowered equally.

My reforms would start with a rule that provides the same income tax benefits for all charitable donations by American taxpayers. This could be achieved by switching from the current form of benefit, the charitable deduction (which provides benefits based on a taxpayer’s marginal rate) to a credit, in which everyone gets the same benefit. A credit of 25 percent for all gifts over a certain amount seems like a good place to start.

I would also reform the tax rules that serve to provide a double benefit for contributions of property, over contributions of cash. The best form of gifts from a nonprofits perspective is generally cash, but our tax system provides more benefits for contributions of property (because people can both avoid capital gains and get an income tax deduction equal to the full value of the property.) To change this result, charitable tax benefits for contributions of property should be modified to remove this double benefit.

I would also consider adjusting the estate and gift tax deduction so that it limited the amount by which people could reduce their tax liability by making charitable gifts. In our current system, the wealthiest Americans can often avoid taxation during life because their assets are either received through inheritance (which is free of income taxes) or through growth of capital assets (which are only subject to tax when sold.) At death, they can avoid estate taxes completely by transferring funds to charity, even their own private foundation. Given the extraordinary wealth inequality in this country, I think it is important that we ensure that everyone participates in paying for the expenses of government. To that end, I would consider limiting the estate tax charitable deduction to 50 percent of the value of the gift.

Finally, I would reform the rules applicable to private foundations and donor advised funds to assure that these funds are distributed for charitable ends within a reasonable period of time. Together these reforms would strengthen charities, while promoting greater equity among taxpayers of all income levels.

Read all faculty Vision Project interviews here.