Tax deductions

Now is the right time to extend tax deductions for charitable donations

Caitlin Flanagan’s critique of private schools in a recent article in Atlantic does not focus on the tax treatment of donations to educational institutions.

But one of the first concrete issues she identifies in her assessment of the inequalities surrounding exclusive private schools with expensive tuition fees is that they benefit from the section 170 charitable deduction.

“Why should parents in public schools – why anyone – support private schools?” Exeter has 1,100 students and an endowment of $ 1.3 billion. Andover, which has 1,150 students, is on track to raise $ 400 million in its current fundraising campaign. And all that money, that glorious money, is coming into the counting office 100% tax-free, ”Flanagan wrote. Exeter and Andover are the Phillips Exeter Academy in New Hampshire and the Phillips Academy in Andover, Massachusetts.

Flanagan’s essay colorfully illustrates how exclusive private schools are a luxury commodity primarily for the very wealthy and a select few winners of the application lottery.

“The god of private school is money,” she said. It takes a lot for many students of exclusive private lessons to attend.

Annual tuition and boarding fees at one of the boarding schools mentioned by Flanagan are just over $ 70,000, although the schools she mentioned all offer financial assistance. If you live near some of the other exclusive schools and can get around, the tuition costs alone can reach over $ 50,000.

The median U.S. household income in 2019 was $ 68,703. The average incomes of the places where some of the exclusive private schools are located are generally higher than the national average, but not that much higher than putting a ninth year that costs the equivalent of several Honda Civics easily within the budget of many. families.

The purpose of the article was to illustrate that there are massive inequalities inherent in the ecosystem of rarefied and exclusive private schools. Yet the policy prescription of removing the deduction for donations to private schools is insufficiently nuanced.

Schools that charge $ 50,000 or more per year are the exception among private schools, not the rule, and to be fair, Flanagan also doesn’t seem to suggest that the entire universe of private schools be taxed on their endowments – if they have any. – or that their benefactors do not obtain a deduction for their donations.

The big picture is that about 70% of private school students in the United States paid less than $ 10,000 per year in tuition, according to 2011-2012 school year data of the National Center for Education Statistics. Even taking into account the likely increases in tuition fees over the past decade, most private schools across the country are offering a year of tuition for a small fraction of the cost of a new Tesla Model Y.

Flanagan suggests – probably without any expectation that schools actually do – that the correct response to this unfair situation would be for exclusive private schools to voluntarily close their doors. Her nod to tax law might be the best place to start, but probably not in the way she suggests.

The problem is not really that the tax law encourages wealthy taxpayers to donate their money to the cause of educating the next generation.

The problem is, wealthy taxpayers seemingly choose to donate to exclusive, expensive private schools which Flanagan says “convey the values ​​of our ruling class – mainly, that a certain hard-working approach to life pays off,” so that this money could instead be given. to existing schools in underserved communities, or even be used to establish and support new schools in places where educational opportunities are limited. The solution to this problem is better education – from wealthy donors.

The tax benefit of a deduction for matching donations made to a private school’s annual gala and to a new foundation created to build and continually support a new private school in an underserved area is exactly the same for a taxpayer. given.

Private schools do not have to charge tuition, so the well-heeled donor or a group of them could build, supply, equip, and pay for the ongoing operation of a school that would be completely free to students. and would benefit from the same tax advantages. for their largesse as they would for donating their money to an expensive and exclusive school. The non-tax benefits of this approach to philanthropy could also be greater.

Presumably, people who donate to exclusive and expensive schools also donate to charitable causes that benefit a wider range of low-income people. Nothing prevents them from doing the maximum good with their money.

High-income households end up being at the center of discussions about the charitable deduction because they are largely the taxpayers who take it. If Congress wishes to advance the cause of fairness, however, opening the deduction to all taxpayers is one way to do it.

The deduction option above the line

The charitable donation deduction passed the turn of the century in the tax code. One way to modernize it would be to make it available to taxpayers who claim the standard deduction.

An incentive for charitable giving above the line – even a limited one – would support a strong interest in diversity by encouraging non-itemized taxpayers to give to the causes and institutions they support, which may be different from those supported by the organizations. detailed taxpayers.

For example, non-retailers might not be very interested in sending their charitable contributions to exclusive private schools, but there might be considerable interest in giving to inclusive local schools, and an expanded deduction would make those donations even more appealing. The standard deduction means that the cost of a donation for a taxpayer who does not itemize could be higher than for a taxpayer who itemizes.

But even if a non-itemized taxpayer has no other deductions approaching the standard deduction threshold and receives a charitable contribution deduction, it does not matter if it is to increase donations and diversity. donations that the non-retail taxpayer obtains a slightly larger tax benefit per dollar of donation than a retail taxpayer.

The main difficulty with constantly expanding the availability of the deduction is that allowing a deduction of contributions above the line would start to add up in terms of lost earnings, making it a difficult policy proposition.

The Coronavirus Aid, Relief, and Economic Security Act set up a natural experiment that will give us a better idea of ​​the effects of allowing non-itemized taxpayers to claim an above-the-line deduction for charitable expenses.

For 2020 alone, taxpayers receiving the standard deduction could claim a deduction of up to $ 300 in charitable cash donations. We’ll eventually find out how many non-retailers have claimed the deduction and whether the temporary benefit has resulted in an increase in donations to a wider range of charities.

This data may not be conclusive on the effect of an above-line deduction for donations in a period of less economic uncertainty than in 2020, which could have depressed donations even with the benefit. additional tax, but they should provide some useful clues.

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