Reforming this law would cause outrage among the non-profit and charity sector, because it would instantly dry up alot of US philanthropy. It still seems like a necessary reform however.
Why? (Serious question. As a matter of full disclosure, I've read 'Dark Money'. To my mind, DAF's don't seem any more evil than any of the other much larger pools of concentrated wealth out there. eg-corporate lobbying money. In fact, the rules seem to make DAF's a good deal less evil.)
My question was, "Why do DAFs need to be reformed?"
Even if you got rid of the charitable deduction, you would still have things like DAFs and Foundations.
Think of it this way, WRA came into being in 1917. But if you take, say, the Carnegie Foundation, that's been around since 1905 at minimum. So even without a charitable deduction, these foundations and DAFs would exist. So the question is, why do they need to be reformed? (Or, more precisely, why do DAFs need to be reformed?)
You linked to an article explaining why you believe WRA to have been a bad idea. (Or maybe why you believe that WRA has become a bad idea? But either way, it's about the reforms introduced by WRA, not specifically about DAFs.)
I don't have any beef with the foundations, I have a beef with our tax policy.
That's just not the case. The reasons that a donor might choose a DAF are legion.
Again, I won't go into them all, but let's take an example that is more common than people realize. A donor who has passed on. Sometimes in life, a couple's children need encouragement to be kindly and generous. Let's put it that way. DAFs are part of a somewhat complicated legal framework that can have the effect of actually obliging heirs to share the family's resources.
And of course there are a million other reasons that one might be motivated to use a DAF.
Point being, DAFs are not solely used as a tax dodge. And the donors are not seeing the benefits from the tax dodge in any case, the vast majority of that benefit is going to the charities and the financial industry. (Heck, many of the donors have even passed on, so of course they don't care about any tax benefit. They made those arrangements for other reasons.)
I agree that the benefit is largely not accruing to the people claiming the tax deduction, but it is a subsidy coming out of the public purse that we should get rid of.
[EDIT]: Actually, I take that back, once you take into account the fact that the amount people donate is not significantly impacted by the tax situation, it seems clearer that the people getting the deduction are the ones getting the benefit/subsidy.
This was surprisingly hard to determine, as it appears this is one of very few such references on the internet.
My bad. I should have defined what that was for people.
WRA of 1917 is what introduced the charitable deduction to the tax code of the United States.
1. No required distribution per year. A DAF has no obligation to actually give its money away in any timely manner. The Bloomberg article actually undersells how close this was to being regulated. Everybody likes this rule though because it allows people to siphon fees off money which should be in a charity.
2. Upfront tax benefit for later charitable benefit. Charitable tax deductions should be linked to actual charitable giving, not promises to do so. DAFs should only give a tax benefit on the disbursements they make to charities, not on a donors disbursement to the DAF. I think this is the least likely fix to happen but also the one that would most directly fix the problem.
3. Capital gains dodging. The article mentions this but this discrepancy with private foundations should be fixed and donations should be deductible at the cost basis level. Think of this as double-dipping.
2. There are a lot of reasons that the tax benefit to the DONOR, is given on disbursement to the DAF. I won't go over all of them, but without getting too technical, imagine that the donor has passed on, or soon will. Should his/her heirs be allowed to take that tax benefit as they donate money in the DAF? I think most people would answer "No" to that question. (Believe it or not, oftentimes more money is left to the DAF or Foundation, than is left to the heirs. You could end up in a situation where heirs pay no tax on the money they're earning from their own portion of the estate).
So again, we can argue the propriety of the general idea of the charitable deduction, but there are a lot of very good reasons that if the deduction exists, it should be given to the donor, or his/her estate, on donation to the DAF.
3. I wouldn't have too much of a problem with a cost basis deduction, and neither would any of the donors. But again, two things, the financial services industry and the charity would have a problem with that. And second, yet again, what we're really talking about is the existence of the deduction at all, because +/-5 to 10% is not going to make much of a difference to a donor. (Many of whom have passed on in any case.) So these DAF's would exist with or without cost basis level deductions. The only difference is, charities would end up with a bit less money or a bit more money. (Depending on what you're looking at with the capital gains.)
One charity I consistently give to is Fisher House. They're directly related to the US government -- they provide houses for military families whose loved ones are in a military or VA hospital. I like the cause, but one reason I give to them over others is because they're incredibly efficient[1]. If the charitable deduction went away, would they raise as much money? Would the government have to step in and do it, and is there any prayer they'd do so as efficiently as Fisher House?
Either way, Fisher House is a great charity, check it out.
[1] - https://www.charitynavigator.org/index.cfm?bay=search.summar...
Are things really so dire in America?
Homelessness is very much on the rise for the world’s richest nation that grew its wealth dramatically in the last couple of years.
Dark money runs through networks of 501(c)(4) organizations. They're a different beast entirely and can participate in politics. You don't get a tax deduction for donating to a 501(c)(4).
Reforms have to be taken into the context of their overall impact towards greater good. If overall charity drops, then the reform is bad. If you cause the charities that are out there scrapping with what they having, using 100% of every resource they have to help as many people as possible to go dry because of a small percentage of bad actors, then there must be another way. Incentivize these greedy assholes to chase money in a different avenue that doesn't impact the general welfare.
Only if the benefits are smaller than the impact of the drop to overall charity.
If we taxed a bunch of money that is, say, 95% billionaire tax-avoidance and 5% effective charity, and spent that tax money on the things we democratically spend money on (and say that's, say, 80% lobbying and pork and what have you and 20% effective stuff like infrastructure and well-targeted welfare programs) then that would be a net win.
Minus the Bill Gates of the world, which we can count on our hands, the vast majority of charity is not done by a "handful of rich philanthropists" but rather, normal, everyday people that want to make a difference. If you turn this into a bureaucratic exercise, there are number of problems that become introduced that have been well pointed out in the past (bureaucracies are slower, the incentives are now not aligned, you now have a third party entity spending instead of first party, so waste is now introduced).
The other issue is public charity only works when society shares common values and beliefs. Unfortunately this just simply is not the case anymore in America and if 2016 made that obvious, it's even more apparent with the Kanavaugh hearings.
Additionally -- this is how every socialist system has started -- "just let the government do the good for you" which many disagree with on principle: why strip people their freedom to do charitable works on some presupposed better governmental solution?
Finally, people forget that the people are what constitutes the public.
Weight by money, not by number of people. What proportion of "donations" to 501.cs come from where?
> If you turn this into a bureaucratic exercise, there are number of problems that become introduced that have been well pointed out in the past (bureaucracies are slower, the incentives are now not aligned, you now have a third party entity spending instead of first party, so waste is now introduced).
Decent charities inherently don't have aligned incentives, because the people they're supposed to benefit are not the people funding them, by definition. So making them accountable is very important and much harder than for other kinds of organisation.
> The other issue is public charity only works when society shares common values and beliefs. Unfortunately this just simply is not the case anymore in America and if 2016 made that obvious, it's even more apparent with the Kanavaugh hearings.
That we have divergent values and beliefs is all the more reason that public money shouldn't be funding private charities. Private charities can and do push particular political or religious causes, or benefit particular groups and not others. If you want to spend your money on your cause that's diametrically opposed to mine, that's fine - but you shouldn't get to spend my tax dollars too. Publicly-funded organisations have a lot more accountability in terms of having to treat everyone fairly, and that's a good thing.
> Additionally -- this is how every socialist system has started -- "just let the government do the good for you" which many disagree with on principle: why strip people their freedom to do charitable works on some presupposed better governmental solution?
You still have the freedom to spend your own money as you see fit. You just don't get a special exemption from the democratically-agreed taxes that everyone else has to pay.
Trump did increase the standard deduction if you’re not itemizing, and dramatically curtailed the state and local tax deductions, so many fewer people will be itemizing, and thus in effect reduced the incentive to donate for those people who’s best tax strategy is to take the standard deduction.