The Metropolitan Museum of Art’s Costume Institute, a walk-in closet filled with old dresses, isn’t my idea of a good cause. But that’s OK. There are plenty of charities that won’t be getting checks from me. What does stick in my craw is that the Met gets to reap the benefits of larger federal tax breaks than your local church or soup kitchen.
Americans with bigger incomes get larger income tax deductions on every dollar they donate to charity. If the famous and fabulous people who glided up the Met’s blue-carpeted steps at the Costume Institute’s annual gala on Monday evening actually paid for their own tickets, which ran $75,000 per person, they could deduct most of the cost. For some of them, that could amount to a discount of about 30 percent off the price of admission.
The Met benefits, too, because tax breaks encourage people and corporations to make larger donations. This year’s gala raised $31 million — more than the budgets of many New York nonprofits, including the Bowery Mission, which helps New Yorkers experiencing homelessness by providing shelter, food and clean clothing.
The charitable tax deduction is distorting American philanthropy. It doesn’t just shape where dollars go, it also warps the way that nonprofits behave. Let’s find out what the Met Gala looks like without the federal government as a silent sponsor.
Let’s change the law so that every donated dollar gets the same federal subsidy, whether it comes from the pocket of a billionaire in a Marc Jacobs tuxedo dress, or from your pocket.
The charitable deduction was enacted by Congress to encourage donations to charity by reducing the giver’s cost. If a person donates $10,000 in income that otherwise would be taxed at a 24 percent rate, the deduction means they can give that $10,000 while only foregoing $7,600. The government is basically chipping in the other $2,400, which it would otherwise collect in taxes. And the hope is that the donor treats the government’s leniency as a reason to give away a little more money.
But donors do not benefit equally. The vast majority of Americans who donate money don’t get any federal tax benefit. More than 90 percent of taxpayers claim a standard deduction, so their donations don’t affect their total tax bill. In 2022, only 7.5 percent of taxpayers itemized any charitable deductions. Even among those wealthy few, the wealthiest enjoy the biggest tax breaks because the value of a tax deduction depends on the taxpayer’s marginal rate. If a person donates $10,000 that would otherwise be taxed at the highest marginal rate, currently 37 percent, they will avoid $3,700 in taxes. If that money would be taxed at only 24 percent, they will avoid only $2,400 in taxes.
The impact on charities is also uneven. A church or a community group in a lower-income neighborhood may get little boost, if any, from the federal subsidies. But it’s a safe bet that most guests at the Met Gala itemize their deductions.
This doesn’t just benefit charities that happen to appeal to rich people. It gives charities an incentive to behave in ways that will appeal to rich people.
Charities, of course, already have plenty of reason to propitiate the wealthy. In the words of the bank robber Willie Sutton, “That’s where the money is.”
But there is no good reason for the federal government to jump on the scales. Under current federal law, Americans in the bottom 40 percent of the income distribution basically pay the full value of each dollar that they donate to charity, while Americans in the top 1 percent of the income distribution pay only about 71 cents on the dollar. That’s great for the institutions that wealthy people like to support, such as museums and universities. But why should federal tax policy privilege the preservation of old dresses, or the construction of new dormitories at Harvard, over the needs of parent-teacher associations or community groups that depend on the support of local residents in less affluent neighborhoods?
One possible corrective, less radical than it may sound, is for the government to stop subsidizing donations. Congress created the charitable deduction in 1917, just a few years after creating the income tax, because it worried the government was siphoning money from charities. The deduction does seem to provide a modest boost to charitable giving, but another way of describing the available evidence is that most donations to charity aren’t motivated by tax breaks. In 2017, President Trump’s tax law reduced federal subsidies for charitable giving by lowering marginal rates and raising the standard deduction. Even though the combined effect was to cut the federal subsidy by about 30 percent, a recent analysis estimated the change reduced charitable giving only by 4 percent.
That said, the institutions created and maintained by charitable donations are a critical part of civil society. They bring Americans together, provide for our needs and mobilize us in the pursuit of common interests. And donations themselves are a form of democratic engagement in a society that is desperately in need of more practice.
A better fix for the current system is to replace the charitable deduction with a tax incentive that is determined by the amount of the donation, not the income of the donor.
One intriguing idea is for the government to match private donations. Robert McClelland, a senior fellow at the Urban-Brookings Tax Policy Center, has proposed that for every dollar donated, the government would provide 14 cents to the same nonprofit — a number calculated to maintain the value of the current federal subsidy for charitable gifts.
Under a matching system, the government would provide the same subsidy to everyone — even those who don’t make enough to pay income taxes — which would remove the tax incentive for charities to chase wealthy donors.
It works on the other side of the ocean. The British government’s Gift Aid program, established in the early 1990s, allows charities to collect from the government an amount equal to 25 percent of each individual donation.
Alternatively, the United States could emulate Canada, which gives a tax credit to donors instead of a deduction. The advantage is that the value of a tax credit isn’t determined by the donor’s income. It’s based on how much they give.
It’s been a few years since Representative Alexandria Ocasio-Cortez, the New York Democrat, showed up at the Met Gala in a white dress with “Tax the Rich” printed on the back. That doesn’t look like it’s going to be happening anytime soon. Can we at least agree that the rich shouldn’t get extra help for their pet causes?
