Universities, hospitals, social-service groups, music centers and other organizations that depend on private philanthropy are deeply concerned that their revenues will drop alarmingly with the new lowered income-tax rates.
They arrive at this pessimistic anticipation by assuming that typical donors, although obviously generous toward fellow human beings in need and very responsible about their communities, will reduce their philanthropy budgets because the government, always a partner in charitable contributions through tax deductions, now will allow a smaller deduction.
With a 50% tax rate, the government refunds half a dollar to a taxpayer who sends one dollar to a favorite cause. At the new 30% rate (using a rounded simplified figure) the government will become only a 30% partner. It is presumed that the giver, now suffering a 70-cent final cost for every dollar donated, will surely cut the donation.
It may well be that some philanthropists indeed will think exactly in these terms and will reduce their contributions next year. If so, they will not have done their homework.
Take, for example, a couple with a $200,000 gross income who have been giving away $20,000. Their taxable income has been $180,000 ($200,000 minus $20,000). They have paid a tax of half of this, or $90,000, leaving them net available cash after both contributions and taxes of $90,000. How did they happen to decide on $20,000 as the right amount for their philanthropy? It was not prescribed by law or the Ten Commandments. Nor was it determined in any way by the tax bracket of 50%. Rather, logic says that it was set more by that net available cash figure of $90,000.
These people are philanthropic, pay their taxes honestly and require a certain amount of spendable cash after paying taxes and engaging in philanthropy. Apparently they have found that $90,000 will cover their requirements to preserve their life style, take care of their needs and maybe cover some investments or some savings. The funds left above this figure have been applied to their charities.
But suppose that this same couple, with the same $200,000 gross income, now arrange their giving around the 30% tax rate. Assuming that they still want to maintain the $90,000 spendable-cash figure, they can now give away the much higher amount of $71,000 (see the accompanying table) . That will give them a taxable income of $129,000 ($200,000 minus the deduction of $71,000) and a tax of $39,000. Subtracting both the $71,000 contribution and the $39,000 tax from the original $200,000 gross income results in the same net available cash of $90,000.
Generally, well over a 2-to-1 increase in annual contributions follows from the postulate that the philanthropist may set as his or her principal guideline the preservation of a certain level of final spendable funds. Thus in the table we show that a wealthy couple with $500,000 income and now making a $100,000 contribution can go up to a whopping $214,000 contribution with the lower tax rate and still preserve their needed figure of $200,000 in spendable funds. The final example in the table is for, say, an elderly couple with a $100,000 income, their house paid for, their children financially well off and $45,000 proved by their experience to be adequate to cover their discretionable cash needs. With a 50% tax bracket they have been giving away $10,000. With the new lower tax rate they can donate $36,000 to the causes that they believe in and still retain their required $45,000 cash.
We can't yet know for sure if major donors will really alter their contributions budget in view of the new tax rate. Many psychological as well as economic factors will enter, and they will vary from donor to donor. No one probably plans donations entirely around tax rates in any case.
But why should we assume that typical donors will totally abandon the criteria that they have been using, at least partly, as they adjust to the tax-rate change? If determined to spend as much on themselves as possible, or to increase their net worths to the maximum with all available income, why didn't they cut down their donations earlier? No one made them choose the contribution total that they have been enjoying. They now can afford to be more, not less, philanthropic without lowering their spendable funds.
My wife and I have been involved heavily in philanthropic fund-raising and, within our limits, in personal philanthropy. As we engage in these tasks we shall be guided by the above points and shall make them known to potential donors whom we contact. We suggest to others who engage in such efforts that they adopt the optimistic anticipations that the numbers show to be justified. WHAT'S LEFT AFTER GIVING
(in thousands of dollars)
Net Contri- Taxable Available Year Income bution Income Tax Cash 1986 200 20 180 90 90 1987 200 71 129 39 90 1986 500 100 400 200 200 1987 500 214 286 86 200 1986 100 10 90 45 45 1987 100 36 64 19 45