Abstract

Excerpted From: Samuel D. Brunson, Black Charity: Rethinking the Subsidy of Black Charitable Donations, 21 Pittsburgh Tax Review 61 (Fall, 2023) (49 Footnotes) (Full Document)

The popular story of "big philanthropy" in the United States starts with wealthy white robber barons at the beginning of the twentieth century. They set up foundations to solve big problems and to improve the human condition, but critics accused the foundations of Carnegie and Rockefeller of laundering their wealthy founders' reputations in an attempt to sanctify the dirty money these robber barons had amassed.

By focusing on big (white) philanthropy, though, we erase the contributions of philanthropists of color. While Andrew Carnegie funded institutions dedicated to education and international peace, his was not the only model of philanthropy in the United States. Decades earlier, Mary Ellen Pleasant became one of the first Black women in America to amass a fortune comparable to that of wealthy white men. Like many Black women, Pleasant was involved in charity work, helping white and Black people in California. But her philanthropy had a decided focus on racial equality absent from the big philanthropists' vision: She worked to free Black people illegally enslaved in California. She worked to ensure that California state courts allowed Black people to testify. She sued a streetcar company that would not allow her and other Black Californians to ride, eventually winning in the California Supreme Court. She gave $30,000 to fund the 1859 raid on Harper's Ferry. Not only did Pleasant's philanthropy predate the robber barons', but she also employed a different model of philanthropy, one that directly addressed issues affecting the Black community, issues which may have been invisible to white philanthropists. Her philanthropy filled gaps where government and for-profit enterprises could or would not act.

II. Funding the Public Good

Generally, taxpayers in the United States get no direct say in how their tax dollars are spent. Indirectly, of course, they have some influence: they elect the people who pass and sign tax and spending bills into law. Taxpayers cannot, however, refuse to pay their taxes if the government does not fund the services they want or if it funds things they oppose. Neither philosophical nor religious objection to government spending relieves taxpayers of their obligation to pay taxes.

For some taxpayers, charitable giving represents an exemption from their general inability to direct the use of their tax dollars. Taxpayers who itemize can deduct their qualifying charitable donations. The charitable deduction means that a donor does not bear the full after-tax cost of their donation; rather, the government makes up the difference out of its foregone revenue. Effectively, donors who itemize not only have their donations subsidized, but they also direct a small amount of government spending toward the charitable institution of their choice.

Imagine a taxpayer in the top marginal tax bracket who makes a deductible $100 charitable donation. The taxpayer will deduct that $100, reducing their tax liability by $37. After taxes, the charitable donation cost the donor $63. The charity, however, received $100. Where did the additional $37 come from? The federal government. Effectively, charitable deductibility forces the federal government to make a matching grant to charitable organizations. As a result, when a taxpayer makes a deductible charitable donation, that taxpayer controls how the government spends a small portion of its money.

While Congress did not create the charitable deduction to allow taxpayers to allocate a portion of their tax payments, commenters have highlighted this as one benefit of deductibility. It provides wealthy taxpayers with a sense of ownership over their participation in the tax system.

There is a significant problem with this allocation of tax dollars, though: it is only available to taxpayers who itemize. In 2020, less than 10% of taxpayers itemized, and these itemizers were not spread evenly through the income ladder. In 2019, the Tax Foundation estimated that while nearly all of the top 1% of income earners itemize, only 1.2% of the bottom quintile, only 2.5% of the second quintile, and only 5.3% of the middle quintile do. The benefits of subsidized charitable donations and the benefits of directly allocating some amount of government spending disproportionately accrue to the wealthiest taxpayers.

The regressive nature of the charitable deduction does not just create inequity based on income, however. It also disproportionately benefits white households. In part, this is the result of the wealth gap between white and Black households. The median white household has ten times the wealth of the median Black household. The wealth gap means that Black households have less money to give. In fact, Black households give about 25% more, relative to their income, than white households. Because of the economic disparity between Black and white households, however, that larger proportionate giving represents less total giving. In 2012, Black donors made about $11 billion of charitable donations, but total charitable giving amounted to approximately $229 billion.

While the wealth gap hurts Black donors, so does the design of the federal income tax. At every income quintile, itemized deductions benefit white households more than Black or Hispanic households. With respect to the charitable deduction specifically, Treasury Department research suggests that, within income deciles, the share of families benefiting from the charitable deduction does not differ substantially based on race or Hispanic ethnicity. But upper-middle income Black households get a higher average tax benefit than upper-middle income white and Hispanic households, which makes sense if Black households are donating a higher percentage of their income to charity.

The problem, then, is not that Black taxpayers are not charitable, nor is it that Black taxpayers with enough money do not benefit from itemized deductions. The problem facing Black donors is that too many cannot itemize in the first place, eliminating both the federal subsidy for charity and the ability of Black households to direct their tax dollars. Meanwhile, recent research indicates that lower-income households' giving is more responsive to tax incentives than higher-income households' giving. If the purpose underlying the charitable tax deduction is to encourage charitable donations, its design as an itemized deduction is inefficient.

This design also means that the charitable deduction is inefficient and unjust when it comes to taxpayers of color. While Black and Hispanic households made up about 27% of households in 2018, they only made up 12% of households with income in excess of $200,000, making them less likely to itemize than white taxpayers. And this is a real problem. With a smaller base of potential Black donors, Black charities in many cases need to appeal to white donors to raise sufficient money to operate.

This need to rely on white donors is nothing new--in the early twentieth century, Booker T. Washington's "power resulted from the largess of white philanthropists." But Black charities' need to rely on white donors may undercut the gap-filling that Black charities would otherwise do. Black charities risk having to compromise their goals to appeal to white ideas of philanthropy. As Stokley Carmichael explained, "The goal of black people must not be to assimilate into middle-class America." Donors of color have unique insight and knowledge of what their communities need and, to the extent charities have to appeal to donors who lack that insight and knowledge, the communities may not receive the benefits they need most.

On top of the inequity toward Black donors, nonprofit boards are disproportionately white. Nearly 80% of board chairs and executive directors of nonprofits are white. Fifty-eight percent of rural nonprofits lack any board members of color, and 16% of nonprofits that serve primarily communities of color have all-white boards. But nonprofit boards need to have the "skills, knowledge, networks, experience, and personal backgrounds to fulfill their roles." To meet their responsibilities, nonprofit boards need to have, among other things, the racial, ethnic, and gender diversity that allows them to understand the communities they serve.

The lack of diversity on nonprofit boards may not result directly from the reduced ability of Black donors to claim the charitable deduction. But it may be related. Many nonprofits expect their board members to be donors and to have social connections with potential donors. If Black households face systemic impediments to donating, they are less likely to be recruited for board membership and thus less likely to provide the intimate knowledge that could guide a charitable organization in helping communities of color.

[. . .]

Current law subsidizes big-philanthropy-style charitable giving through an itemized deduction. While that model reflects and benefits white giving, it fails when it comes to treating Black donor households equitably, even where those Black households are disproportionately generous with their charitable giving. This inequitable treatment of Black households may mean that Black charities risk either being underfunded or compromising their missions to appeal to white donors.

To support both Black donors and the charities they favor, the current charitable deduction needs to be rethought and reworked. There are several potential options, but a promising one would be an above-the-line deduction, capped at a rate that benefits Black households without giving disproportionate subsidies to white and wealthy donors.

Associate Dean for Faculty Research and Development and Georgia Reithal Professor of Law, Loyola University Chicago School of Law.

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