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
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,