Chairman’s Report – April 8, 2016

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  • Source: FAIRtax
  • 04/09/2021
Dispelling the Myth that the FAIRtax Harms Charitable Giving
The word "philanthropy" derives from the ancient Greek word “philanthropia”, meaning "to love people."   Since the founding of the United States, there have been charities.  Many of them were religious-based but some were for the benefit of the community.  The U.S. has been known as a country whose citizens contributed to charities. 
Andrew Carnegie and John D. Rockefeller
Between 1911 and 1913, prior to the income tax, Andrew Carnegie donated nearly $300 million, $7.5 billion in 2015 dollars.  In 1913, John D. Rockefeller donated $35 million, worth $853 million in 2015 dollars.  The present income tax started in October of 1913, but there was no charitable deduction until 1917 so these generous gifts were not based on any tax advantage.
Do Tax Rates Affect Charitable Giving?
Many representatives of charities tell everyone that will listen that charities will actually close if the charitable deduction is eliminated.   These charity spokespeople seem to believe that the amount of donations to charity is directly tied to the ability of people to obtain an income tax deduction for their donations.  They seem to believe that there are no more people like Carnegie and Rockefeller.  They also believe that the higher the tax rate and the greater the value of the deduction is also a large factor in charitable donations. 
The only way for an individual to get a tax deduction for a charitable contribution is to itemize their deductions.  Since only about 30% of the income tax filers itemize, 70% of the income tax filers will not be affected if the charitable deduction goes away.
Additionally, history doesn’t support this view.  Giving USA compiled the following chart showing charitable giving as a percentage of Gross Domestic Product.

The Philantrophy Roundtable stated, “There seems to be something stubborn about that 2 percent rate.”
In 1971, the income tax rate on wages was 50% but this went up to 70% on income from earnings on investments.  In the 1980’s the marginal income tax rate dropped to as low as 28% and in 2001 it was up to 43%.  Now it is 44.6%.  Yet the percentage of charitable donations remains close to the “stubborn 2% rate” of U.S. GDP.  However, the good news for charities is that the amount of donations has greatly increased because of the growth in the U.S. GDP.  In 1971, the U.S. GDP was $1.1 trillion and 2.1% meant $231 million in charitable donations and in 2014 it was over $17 trillion and this means nearly $350 billion in charitable donations. 
Taxing At The Point of Consumption
Charitable giving is a form of consumption—you are giving money to an organization that will consume that money in providing goods and services.    The income tax pre-taxes consumption by taking taxes out before you spend which reduces the amount you have to consume.  If you are in the 30% of Americans who itemize, the charitable deduction allows you to recover some of the money that you have paid in taxes. 
For example, if a person earns $1,000 and has a tax rate of 30%, then they will pay $300 in income tax and have $700 remaining.  If that person gave $100 to a charity, the $1,000 of income is reduced, for tax purposes, to $900.  30% of $900 is $270 of income tax.  The $100 donation to charity only cost the donor $70 and the remaining $30 came from income taxes that the donor did not pay.
If you do not itemize, then the charitable payments have been pre-taxed, the taxes being deducted from your gross pay before you receive them.  This means that the $100 donation to charity by the non-itemizer will effectively cost the donator not $100 but the $125 or more that has to be earned to yield a net of $100 after deduction of taxes.
Why Pre-Taxing Consumption Reduces Charitable Giving
Under the FAIRtax donations to charities will not be subject to the FAIRtax.  Remember, the charitable deduction available to the 30% of taxpayers who itemize their deductions only allows them to recover some of the taxes already paid.  If all Americans are allowed to receive their entire paycheck and then decide how to allocate their money, many of them will contribute.
Under the FAIRtax, all Americans will receive their entire paycheck and can make the $100 charitable donation and it will only cost them $100—not the $125 or more if they don’t now itemize on their tax returns.  
Growth of Gross Domestic Product
It seems obvious that, based on the history of charitable donations, the thing that will help charities most is to more rapidly grow the gross domestic product of the U.S.
There is almost universal agreement that the U.S. GDP will grow more rapidly under a tax based on consumption, like the FAIRtax.  If the historical 2% average continues, the larger the GDP, the more that will be given to charity.
The Beacon Hill Institute did a study on the effect of the FAIRtax on charitable giving.  The report concluded, In the final analysis, the adoption of the FairTax would not decrease total individual charitable contributions. To the contrary, due to the price and income effects, among its other benefits, the FairTax would induce an increase in charitable contributions, subsequently strengthening the vitality of the charitable organizations that are so instrumental in their role in the U.S. society.
People contribute to charities in which they believe.  For most of us, the amount that we donate is directly linked to how much money we have left after paying our bills.  Neither Carnegie or Rockefeller donated because of tax reasons.  They donated because they wanted to give to the community. 
There is the story of a preacher who got up one Sunday and announced to his congregation: "I have good news and bad news. The good news is, we have enough money to pay for our new building program. The bad news is, it's still out there in your pockets."
If we have more money in our pockets, we can and do donate more.  It only stands to reason that a tax system that doesn’t pre-tax charitable donations and grows the economy will increase charitable giving.  As John Kennedy famously said, “A rising tide lifts all boats.”
Charities will love the FAIRtax!
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