Do people donate to charity for the tax deduction?
The people of the United States have traditionally been very generous. Our culture of charitable giving, especially among the exceptionally wealthy, is very unique in the world. For example, Jeff Bezos announced in November of 2022 that he plans to give away most of his wealth (over $100 billion) during his life time. He is following the example of hundreds of American philanthropists who have preceded him for more than 100 years. Our culture of giving dates back to a time before the income tax even existed.
But why do we give? Some of the most cynical among us say that it is a quid pro quo transaction in exchange for a tax break. However, this just doesn’t pass a mathematical reality check. Jeff Bezos plans to donate most of his wealth; if most of his money is gone then there is very little wealth left to pay income taxes on. People do not attain a stronger financial position by donating to charity—the math simply doesn’t work that way. If someone donates one dollar to charity, they save less than one dollar on their taxes—in point of fact they only save at their marginal tax rate. A very high combined federal and state income tax rate for a wealthy individual would be fifty percent—does it make sense to spend one dollar to save fifty cents? It is impossible to save more money than you give away. A completely self-interested person trying to optimize their financial position would just keep the dollar, give nothing to charity, and pay tax at their marginal rate.
So, when people give to charity, both the rich and poor alike, the primary motivation cannot be to better their own financial position with tax breaks. This reckoning is backed up by research-based survey data. The inaugural charitable gift report by BNY Mellon Wealth Management clearly shows that tax breaks are not an important incentive for philanthropy among the ultra-wealthy—instead, tax breaks ranked very low on the list of motivational reasons. The study points to personal satisfaction, connection to a good cause, and a sense of duty regarding giving back as being the most important inspirations for giving to charity. This study is very consistent with similar research performed by many other organizations through the years. A tax deduction simply isn’t a primary motivating reason for people giving to charity.
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