[Foundation-l] Fwd: The question of tax-deductible donations

[Sebastian Moleski]

On 10/24/07, Michael Bimmler <mbimmler at gmail.com> wrote:
>
> [forwarded post from non-member]
>
>
> From: Mike Godwin <mgodwin at wikimedia.org>
> Date: October 24, 2007 4:36:20 AM EDT
> To: foundation-l at lists.wikimedia.org
> Subject: The question of tax-deductible donations
> The point I think Brian McNeil has made is a good one -- only a third
> of Americans itemize their deductions, and we have no reason to
> believe the demographics of our American donors are different from
> those of Americans generally. (That's the null hypothesis.) What this
> suggests is, in the absence of more data about donors and
> deductibility, we should stress altruism more than the tax deductions.
> Yes, we can say "in some nations, including in the United States, you
> may be able to obtain a tax deduction for your donation."  Or
> something similar. But I don't want to take the risk of overpromising
> on the tax-deduction question.  We'd like people to give to Wikimedia
> because it's the right thing to do and not because they necessarily
> get a reduction in their taxes.


There's a different angle that this can be looked at however. It's true that
reducing your tax burden in itself isn't a good incentive to give to
charity. After all, your actually disposable income is actually going to be
less than if you didn't give to charity at all.

Rather, what we should stress more is that tax deductibility allows
individuals to make larger contributions than they ordinarily could or
would. How much more willing do you think Jane Taxpayer would be to donate
$100 net off her own income to the foundation if she knew that the benefit
to Wikimedia could actually be $125 without any additional cost to her
(assuming an 20% average income tax rate)?

This incentive of course gets stronger the higher the individual tax rate
is. The top tax rate in the United States in 2006 was 35% but you had to
make at least $336,551 to fall into that bracket. In contrast, the top tax
rate in Germany in 2006 was 42% but you only had to make €52,152 (rougly
$73,000) to be affected by that. What that means just in this little
comparison is that the actual average tax benefit in Germany is much higher
than it would be in the United States. Presumably, the same situation is
true for other countries.

Also, there's a logical fallacy here by stating that since only one third of
Americans/donors itemize we don't need to emphasize the deductibility. The
point missing here is that not all donors are equal because they do give
different amounts. And if there is a positive relationship between
disposable/taxable income and donation amounts, the IRS statistics show that
those donors who give more are also more likely to itemize their deductions.
In other words: those people who give to the foundation the most would be
most attracted by the information about deductability of taxes. If we look
at this issue from a pure bottom line perspective, it makes sense that we
cater to those donors to the extent possible.

In essence, what I'm trying to get at is that we shouldn't fall into the
trap of assuming that people behave the same way in other countries as they
do in the US. Specifically in this case I would rather favor putting more of
an emphasis on the tax deductibility in our materials and especially spend
some time investigating the local issues for those countries that are
significant donation sources. One problem, for example, under German law one
cannot deduct charitable contributions to foreign charities. That quite
practically means that Germans who give directly to the foundation cannot
deduct these donations on their tax return so the incentive mentioned above
doesn't exist. I would be surprised if there are not similar issues in other
countries, which we should be aware of.

Sebastian