The Metropolitan Museum of Art’s Costume Academy is a walk-in closet filled with old gowns, which is not my good idea. But that doesn't matter. There are a lot of charities that won't get checks from me. What I insist on in my cra feet is that Metropolitans get a bigger benefit from federal tax breaks than local churches or soup kitchens.
Americans with larger incomes receive a larger income tax break for every dollar donated to charity. If the famous people gliding through the blue carved steps of the Metropolitan Metropolitan at the annual party of the Costume Academy on Monday night are actually paying for their tickets, which cost $75,000 per person, they can deduct most of the fees. For some of them, this could be discounted for about 30% of the ticket.
Metropolitan earnings are also because tax breaks encourage people and companies to donate more. This year’s party raised $31 million, more than the budgets of many New York nonprofits, including the Bory mission, which can help New Yorkers homeless by providing shelter, food and cleaning out clothing.
Charitable tax cuts are distorting American philanthropy. It not only shapes where the dollar goes, but can also be distorted according to the behavior of nonprofits. Let's find out what the Met Gala looks like without the federal government as Shen Mo's sponsor.
Let's change the law so that every dollar donated receives the same federal subsidy, whether it comes from the pocket of a billionaire in a Marc Jacobs tuxedo, or from yours.
Congress has formulated charitable deductions to encourage donations to charities to reduce the cost of the giver. If a person donates $10,000 in income, otherwise taxed at a 24% rate, the deduction means they can give $10,000, compared to just the $7,600 mentioned above. The government basically raised it in the other $2,400, otherwise it would be collected by tax. Hope donors see government leniency as a reason to pay more.
But donors cannot benefit equally. The vast majority of Americans who donate money will not receive any federal tax benefits. More than 90% of taxpayers require deductions, so their contributions do not affect their total tax bill. In 2022, only 7.5% of taxpayers itemize any charitable deductions. Even among those rich minorities, the richest tax relief is the largest, because the value of the tax reduction depends on the marginal interest rate of the taxpayer. If a person donates $10,000, otherwise taxes will be imposed at the highest marginal interest rate (currently 37%) and they will avoid taxes of $3,700. If the money is taxed at only 24% tax, they will avoid taxes only $2,400.
The impact on charities is unbalanced. Churches or community groups in lower income communities may receive little enhancement (if any) from federal subsidies. But it's a sure bet, with most guests listing their deductions itemized on Met Gala.
This not only makes it beneficial for charities that happen to attract the rich. It gives charities the motivation to act in a way that attracts the rich.
Of course, charities already have many reasons to promote the rich. In the words of bank robber Willie Sutton, “That’s where the money is.”
However, the federal government has no good reason to jump to scale. Under current federal law, the lowest 40% of Americans in the income distribution basically pays the full value of each dollar they donate to charities, while the top 1% of Americans in the income distribution pay only about 71 cents of dollars. This is great for institutions that the rich like to support, such as museums and universities. But why do federal tax policy privileges preserve old gowns or build new dormitories at Harvard to rely on the needs of parent-teacher associations or community groups that rely on support from local residents in less affluent communities?
One possible corrective measure, less radical than what sounds, is the government stop subsidizing donations. Just a few years after the income tax was imposed, Congress created a charitable deduction in 1917 because it feared the government had drawn money from charities. Deductions do seem to provide a modest boost for charitable donations, but another way to describe the evidence available is that most donations to charities are not motivated by tax deductions. In 2017, President Trump's tax laws reduced federal subsidies by lowering marginal interest rates and raising standard deductions. Even though the combined effect is to cut federal subsidies by about 30%, recent analysis estimates that the change has decreased by only 4%.
That is, institutions created and maintained by charitable donations are a key part of civil society. They bring Americans together to meet our needs and mobilize us to pursue our common good. Donation itself is a form of democratic participation in a society that urgently requires more practice.
A better solution to the current system is to replace charitable deductions with tax incentives determined by the amount of donors rather than the income of donors.
An interesting idea is that the government matches private donations. Robert McClelland, a senior fellow at Urban-Brookings Tax Policy Center, proposed that the government will provide 14 cents to the same nonprofit for every dollar donated, a figure designed to maintain the value of current federal charitable gift subsidies.
Under the matching system, the government will provide the same subsidy for everyone, even those who are not enough to pay income tax, which will eliminate tax incentives for charities to chase wealthy donors.
It works on the other side of the ocean. The British government’s Gift Aid Program was established in the early 1990s and allowed charities to collect from the government an amount equal to 25% of each contribution.
Additionally, the United States can follow Canada's example, which provides donors with tax credits, not deductions. The advantage is that the value of the tax credit is not determined by the donor's income. This is based on how much they have paid.
It has been several years since New York Democrat Alexandria Ocasio-Cortez appeared at the Metropolitan Gala in a white dress with the “Tax Rich” printed on the back. It doesn't look like it will happen anytime soon. Can we at least agree that the rich shouldn’t get extra help for their pet career?
