Friday, April 13, 2007

Wading In (UPDATED)

Lee Rosenbaum invites me to join the conversation she's been having with Tyler Green about the tax treatment of charitable donations to foreign museums. Should international and domestic donations be treated the same for tax purposes? Lee says no; Tyler takes the universalist view and says yes. (Ed Winkleman sides with Tyler.)

I think it's a complicated question, and it depends on what you think the purpose of the charitable deduction is in the first place. First, the basic structure of the law. Our tax system does in fact privilege domestic over foreign giving, at least to some extent. Since the 1930's, we've had what some call a "water's edge policy": for a charitable contribution to be deductible under section 170 of the Internal Revenue Code, the donee must be "created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any possession of the United States." (That's for income tax purposes; gift and estate tax deductions are not subject to the same limitation.) On the other hand, as the discussion between Lee and Tyler suggests, there's plenty of international philanthropy taking place, and that's because U.S.-based nonprofits may (1) engage directly in charitable activities overseas and (2) re-donate funds they receive to foreign charities (in the latter case, as long as the intermediate U.S. charity is not deemed to be a "mere conduit"). So our current tax policy does not preclude deductibility for internationally-targeted donations, but does make them a little trickier (e.g., the foreign charity has to set up, and properly maintain, a "friends of" organization to receive the donations).

Is that the right policy? Should foreign and domestic charitable donations be treated the same? I guess, to the extent you see the deduction simply as a way of encouraging people to do good things, then, yeah, there doesn't seem to be any strong reason to distinguish between doing good things here and doing good things overseas. If we're going to encourage people to support art, what's the difference between supporting art in Philadelphia and supporting art at the Hermitage? As Tyler says, it's all part of our "common cultural history."

That's certainly one way to look at the question (and, as Lee concedes, probably how most people see it). An alternative approach would be to view the charitable deduction as a kind of "substitute" for direct expenditures the government would otherwise have to make. As the legislative history of the Revenue Act of 1938 (which enacted the "water's edge" policy) put it, "the [deduction] is based upon the theory that the Government is compensated for the loss of revenue by its relief from the financial burden which would otherwise have to be met by appropriations from public funds, and by the benefits resulting from the promotion of the general welfare." To the extent you buy this rationale for the deduction (and I'm not sure I do), distinguishing between domestic and foreign donations starts to look less strange: the less money the Philadelphia Museum receives through private donations, the more the government is going to have to give to it. But the same is not true of the Hermitage or the Mauritshuis. I don't think anyone would argue that private donations to those institutions are a substitute for funding the U.S. government would otherwise feel compelled to provide.

So if one wanted to construct a defense of Lee's position, I think that's generally what it would look like. As I say above, I'm not sure how convincing it is, though. Notwithstanding that legislative history, I don't think the best way to think about the deduction is as a substitute for spending the government would otherwise be making. (To take one example, how then to explain the deductibility of gifts to religious organizations, which clearly do not provide services the government would otherwise be providing?) I think that, over time, the deduction really has come to be seen as a way of encouraging people to "do good," and it's hard to see how helping victims of the 2004 tsunami, or helping preserve the Hermitage's Matisses, doesn't qualify as doing good.

UPDATE: JL at Modern Kicks weighs in here.