Do people donate to charity for the tax deduction?

by: Kyle Anderson
November 16, 2022
Red and yellow piggy banks

The United States has a long-standing tradition of generosity among its people. Our culture of charitable giving, particularly among the exceptionally wealthy, is truly remarkable on a global scale. A striking example of this is Jeff Bezos, who announced in November 2022 his intention to donate the majority of his wealth, totaling over $100 billion, during his lifetime. He joins the ranks of countless American philanthropists who have dedicated themselves to giving back for well over a century. Remarkably, this culture of giving predates the existence of income tax itself.

But what drives this generosity? Some skeptics argue that it is merely a transactional exchange for a tax break. However, a simple examination of the math reveals the flaws in this notion. If Jeff Bezos donates most of his wealth, it follows that there is very little left to be subjected to income taxes. Donating to charity does not lead to a stronger financial position; the math simply doesn't support such a claim. When someone donates a dollar to charity, their tax savings amount to less than a dollar—in fact, they only save at their marginal tax rate. Even for a wealthy individual facing a high combined federal and state income tax rate of fifty percent, spending a dollar to save fifty cents is hardly a sensible choice. It is impossible to accumulate more money than one gives away. A purely self-interested individual seeking to optimize their financial position would retain the dollar, refrain from donating to charity, and pay taxes at their marginal rate.

Therefore, when people, both rich and poor, give to charity, their primary motivation cannot be solely driven by financial gain through tax breaks. This understanding is supported by research-based survey data. The inaugural charitable gift report by BNY Mellon Wealth Management reveals that tax breaks rank low on the list of motivational factors for philanthropy among the ultra-wealthy. Instead, personal satisfaction, connection to a worthy cause, and a sense of duty to give back emerge as the most significant inspirations for charitable giving. This study aligns well with similar research conducted by numerous organizations over the years. Clearly, a tax deduction is far from being the primary motivating factor behind people's decision to contribute to charitable causes. In the realm of charitable giving, personal fulfillment, genuine connections to worthy causes, and a deep sense of duty to give back prevail as the true driving forces, eclipsing the notion of tax breaks as the primary motivation for people's decision to contribute.

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