America's volunteers deserve a tax break

David G. Tuerck

Thousands of Americans have gathered for the Presidents' Summit for America's Future to find ways to provide health and educational assistance for children and to strengthen volunteerism and community values.

It is one thing to extol the virtues of volunteering. It is another, however, to apply volunteer effort effectively to solve America's problems. Doing so means taking advantage of the connections among tax policy, giving and volunteering.

We are a nation of givers. According to the most recent data, individual Americans donate more than $105 billion annually to charity; 22 million Americans give at least 5% of their income to charitable and community-based organizations.

We are also a nation of volunteers. According to Independent Sector, about 50% of Americans volunteer their services, to a wide range of nonprofit organizations. Twenty-five million Americans volunteer five or more hours per week. In total, Americans volunteer over 20 billion hours per year. Valued at the minimum wage, this amounts to about $100 billion in volunteer effort, each year, about as much as individuals contribute in cash to nonprofit organizations.

Thus, giving and volunteering already play a vital role in America. But what can government do to encourage more of both?

The answer lies in part with tax policy. Consider the price that taxpayers face when they decide to give a dollar to charity. For an itemizing federal taxpayer in the 28% tax bracket, the price is 72 cents. In effect, the federal government gives the taxpayer a 28 cent rebate for contributing each dollar.

The price of giving has a great effect on people's willingness to give and to volunteer since the two go together. This is because giving and volunteering go together. In his landmark study, Federal Tax Policy and Charitable Giving, Charles Clotfelter reported that people both give more and volunteer more as the price of giving falls. Most studies show that a decrease in the price of giving causes giving to rise by more than tax revenues fall. A Beacon Hill Institute of more than 64,000 taxpayers shows that a 1% decrease in the price of giving raises giving by 1.12%.

Thus, the 28 cents in tax revenue that it costs the federal government to let a taxpayer deduct his dollar contribution to a soup kitchen is offset by a twofold benefit: The soup kitchen receives another dollar to spend feeding the poor. And it receives additional volunteer assistance from the taxpayer, allowing it to channel more of its income directly to the poor.

If President Clinton wants to put substance into the spirit of voluntarism, he should recommend that Congress lower the price of giving, by offering a tax credit - sometimes called a "compassion tax credit" - for individual contributions to charities that serve the poor.

A tax credit of this kind would permit the taxpayer to deduct part or all of his contribution to a qualified charity from his tax liability, rather than, as with a deduction, from his taxable income. Thus, Congress could reduce the price of giving to 10 cents by offering a 90% tax credit or to zero by offering a 100% tax credit.

While some might decry this as "tax tampering," it is in fact entirely consistent with a philosophy of limited government, since it motivates individual taxpayers to donate their own time and money to aid the poor and that reduces the pool of tax revenues available to government. The compassion tax credit is in fact the next logical step toward welfare reform.

Indeed, the existing and widely used tax deduction is itself a form of tax tampering, and not a very democratic one at that. Fifty years ago, Nobel laureate William Vickrey condemned the practice of offering tax deductions as lending a "plutocratic bias" to giving. A tax credit eliminates this bias by giving the same price break to both low-income and high-income taxpayers whether they itemize their deductions or not.

Some states already allow tax credits for contributions to charities that serve the poor. A Beacon Hill Institute survey of nonprofit organizations in those states found that 87% of respondents believe that tax credits are a good idea. Eighty-three percent agreed that volunteers are necessary for helping those in need, 77% agreed that volunteers are reliable workers, and 88% agreed that volunteers save their organizations money.

There are a number of proposals before Congress to offer federal tax credits. These proposals represent a new kind of welfare devolution, one that strengthens those very community organizations to which the summit is a call to action.

The summit "is about getting Americans off the sidelines and getting on the playing field," says Colin Powell, its general chairman. The compassion tax credit represents our drive to get not just onto the playing field, but over the goal line.

David G. Tuerck is Executive Director of the Beacon Hill Institute at Suffolk University in Boston, where he also serves as Professor and Chairman of Economics. This article originally appeared in The Wall Street Journal, on Page A18 on April 28, 1997.

Format revised on 18 August, 2004