A Lay Word for a Legal Term: How the Popular Definition of Charity Has Muddled the Perception of the Charitable Deduction

• Publication year: 2021

89 Nebraska L. Rev.997. A Lay Word for a Legal Term: How the Popular Definition of Charity Has Muddled the Perception of the Charitable Deduction

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Paul Valentine(fn*)

A Lay Word for a Legal Term: How the Popular Definition of Charity Has Muddled the Perception of the Charitable Deduction

TABLE OF CONTENTS

I. Introduction.......................................... 998

II. Why Have the Charitable Deduction................... 1001
A.Historical Justifications for the Deduction-What Did Congress Mean by Charitable? ................ 1004
B.Theoretical Rationales for the Charitable Deduction......................................... 1006
1.Measurement of Income ....................... 1007
a.Professor Andrews's Ideal Income Tax Model ..................................... 1007
b.Professor Bittker's Public Service-Morality Model ..................................... 1008
2. Subsidy Theories.............................. 1009
a.Charity Performs Government Functions ... 1009
b.Professor Levmore's Promotion of Pluralism Theory..................................... 1011
C.Public Justifications-The Misguiding Rhetoric in Defense of the Charitable Deduction ............... 1014

III. Does It Fulfill the Public Rationale? ................... 1016
A. Amount of Giving Subject to the Charitable Deduction ......................................... 1017
B. Breakdown of Total Charitable Giving According to Organizational Purpose............................ 1018
C.Taxpayers' Donative Preferences Relate to Taxpayers' Levels of Income.......................1020
D.Value of the Charitable Deduction Accruing to Organizations Engaged in Poverty Relief...........1022
E.Distribution of Contributors to Religious Organizations by Income Level....................1025

IV. A Revenue Neutral Proposal..........................1027
A.The Importance of Labels..........................1028
B.The Proposal......................................1029

V.Conclusion............................................1032

APPENDIX I ................................................1034

APPENDIX II................................................1044

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A good catchword can obscure analysis for fifty years.(fn1)

I. INTRODUCTION

In the United States there is a deeply held conviction "that taxpayers who donate to charity should generally not be subject to the same income tax liability as similarly situated taxpayers."(fn2) This innate sense about the Internal Revenue Code's § 170,(fn3) otherwise known as the charitable deduction, resonates with Americans' sense of fairness and creates strong barriers to curtailing its function.(fn4)

This same sense of fairness is tied to the perceived effects of the charitable deduction.(fn5) Yet, how "charitable" is the charitable deduction, and how charitable do we expect it to be? This Article argues that the discrepancy between the popular meaning of the word "charitable"

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and the legal meaning has distorted both the perception of, and the political justifications for, the provision.

The charitable deduction's definitional discrepancy is perhaps not immediately apparent, because often the legal and layperson's definitions of the word are the same. However, on occasion, the legal and popular definitions vary.(fn6) One such example is the difference between the Tax Code's and layperson's definition of the word "charitable."(fn7) The laypersons' definition is simple; the Merriam-Webster dictionary defines charity as "generosity and helpfulness especially toward the needy or suffering."(fn8) The legal definition is not quite as succinct. The Treasury regulations define charitable as:

[r]elief of poor and distressed or of the underprivileged; advancement of religion; advancement of education or science, erection or maintenance of public buildings, monuments, or works; lessening of the burdens of Governments; and promotion of social welfare by organizations designed to accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or (iv) to combat community deterioration and juvenile delinquency.(fn9)

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Thus, although the legal definition does cover direct relief of the poor,(fn10) it also has a much wider mandate, including advancing religion, science and education, constructing public buildings, lessening neighborhood tensions, and other public benefit purposes.(fn11) These types of causes may provide a service to society, but they are neither charitable under the popular meaning of the word nor would most individuals consider organizations that provide such services a charity.(fn12)

This broad legal definition of "charitable" has created a mispercep-tion in the American psyche of where the benefits of the charitable deduction are allocated.(fn13) The very use of the word "charitable" in the statutory language creates a powerful association in most non-lawyers that ties the deduction to churches and poverty relief organizations, when in reality this is only a small portion of the tax subsidy.(fn14) Further, the emotive rhetoric used by politicians when attacking proposed amendments curtailing the charitable deduction is grossly out of sync with the primary beneficiaries of the provision.

This Article argues that that the definitional gap between the legal and lay definition of "charitable" impedes meaningful discussion of

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amendments to the charitable deduction.(fn15) This has led to mistaken or underestimated assumptions about the allocation of the subsidy. A clearer understanding of where the § 170 subsidy is allocated would allow politicians and the public to more critically examine this tax ex-penditure.(fn16) In light of this confusion, the Article proposes Congress should rename § 170 the "qualified donation deduction"-a term that would not create the same poverty relief associations as the charitable deduction misnomer.

This Article is structured as follows: Part II looks at how Congress and commentators justify the charitable contribution, examining the historical, theoretical and political justifications of the section. Part III examines the data associated with the charitable deduction and calculates the percentage of the charitable deduction expenditure that is allocated to direct poverty relief. Part IV proposes that Congress rename the charitable deduction to break the association between the charitable deduction and poverty relief. This section also addresses the main critiques of this proposal. Part V concludes.

II. WHY HAVE THE CHARITIBLE DEDUCTION

The Joint Committee on Taxation (JCT) estimated that between 2005 and 2009, the charitable deduction saved individual taxpayers in the United States $228 billion.(fn17) In a more recent study, the JCT estimated that the charitable deduction saved individual taxpayers in the United States $36.2 billion in 2008.(fn18) Although these figures are ad-

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mittedly small when looking at overall government expenditures, nevertheless they are a sizeable sum.(fn19) For instance, in 2006 the deduction cost more than the government spent on "managing public lands, protecting the environment and developing new energy sources."(fn20)

Section 170 "costs" the government these revenues(fn21) because it allows individuals who itemize their tax returns(fn22) and donate to churches or qualified public charities and private foundations under § 501(c)(3)(fn23) to reduce their taxable income by the amount contrib-uted.(fn24) This reduction of taxable income has been described as a tax expenditure by a number of commentators, including Professor Paul McDaniel(fn25) and the Joint Committee on Taxation (JCT).(fn26) Tax expenditures

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are "revenue losses attributable to provisions of the federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability."(fn27) In other words, tax expenditures are any reductions of "income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers."(fn28) Further, tax expenditures "are considered analogous to direct outlay programs, and the two can be viewed as alternative means of accomplishing similar budget policy objectives."(fn29)

The charitable deduction results in a subsidy for donors, and the amount of the subsidy is a function of donors' marginal tax rates.(fn30) For instance, suppose a taxpayer who is in the 35% tax bracket gives $100 to charity. Under § 170, that taxpayer can then reduce his taxable income by a $100, reducing his tax liability by $35. In real terms, the taxpayer is only out of pocket $65 and the government has paid $35 in lost revenues. For the example given above, the $35 loss of revenue is a $35 tax expenditure and is no different, assuming no transactional costs, to a situation where the taxpayer pays the charity $65 and the government paid the same charity $35.

Although there is growing consensus that the charitable deduction is a tax expenditure,(fn31) there is still no accepted rationale for the charitable deduction and why the United States has some of the world's most generous tax breaks for charitable giving.(fn32) In fact, from its very inception the charitable deduction has been ideologically misunderstood. This section...