Charitable Contributions in the United States

1. Charitable Contributions in the United States by Leon E. Irish and Karla W. Simon International Center for Charity Sector Law (www.iccsl.org) Keynote Presentation at Private Foundation/CPRI Conference 2013/11/14

2. Karla W. Simon is also the author of Civil Society in China -- The Legal Framework from Ancient Times to the “New Reform Era” • The book was published in March 2013 by Oxford University Press • For all other information on Leon Irish and Karla Simon consult their bios on www.iccsl.org

3. History and theories of charitable contribution deduction • In U.S. law since War Revenue Act of 1917 • Various theories for it are advanced by U.S. law professors, which we will not bore you with • We subscribe to the oldest one -- that the contributor is entitled to a deduction because of the benefit to the community through the gift to the charity -- as we explain below

4. Breadth of the deduction in U.S. • Available to individuals and corporate entities • Rates -- generally 50% of adjusted gross income for individuals who contribute to public charities; 10 % of adjusted gross income for business entities • Lower limits for different kinds of property -- very complex • Available not just for the income tax -- also for individual estate and gift taxes • Unlimited individual charitable contribution deduction for estate taxes

5. FMV deduction • One important feature is that the full fair market value of property donated is generally deductible • That means that an owner of stock in a company with a value of $100 per share may deduct that amount when s/he donates the stock • It does not matter whether the stock was purchased for $1.00 or $10.00 per share • There is no tax on the increase in value,which gives a huge tax break at the time of donation!

6. Comparison with China and France • China’s rates for individual and corporate taxes compare favorably with U.S. -- 30% for individuals and 12% for corporations • France has one feature U.S. does not have -- a wealthy person may pay estate taxes with art works, for example • Pablo Picasso’s estate did that and thus contributed much art to the French state to satisfy the estate taxes that were due at his death

7. What has the U.S. contribution deduction supported? • For wealthy people with much money, valuable art, or stock shares to donate, it has helped to create great opera companies, museums, etc. • Such people also give large sums to educational institutions, such as Stanford and Duke universities • People who are less well off contribute to many other causes: for example, we tend to contribute to NGOs engaged in relief work, such as Relief International www.ri.org, and we also support ICCSL

8. Poorer people’s gifts • These people tend to give to religious causes, through their churches, synagogues, temples, etc. • In fact many of them do not benefit from the deduction because of a quirk in U.S. law • But they give anyway and in quite large sums in the aggregate

9. Problems over time • There were attempts to cut back on the deduction at times in the past • But they generally did not succeed • There is a strong lobby in Congress in support of it because of the great help it provides to arts institutions, which in the U.S. do not receive a lot of state money • In that sense the general theory behind it is recognized

10. One set-back • The Tax Reform Act of 1969 had an impact on the rules related to the contribution deduction • There was a general animosity towards rich people and large foundations, such as the Ford Foundation • Populist politicians from the center of the country decided to take on the rich people with their own foundations • Some foundations had supported liberal causes that those populists did not like

11. Tax Reform Act of 1969 • In that law there were special provisions added for private foundations and some limitations on contributions to them that are not as generous as those for what are now called “public charities” (reduction of 50% limit to 30% or 20%) • In addition, the testimony of John Rockefeller at the hearings (who had paid no tax due to an unlimited charitable contribution deduction available at the time) led to the limit of 50% of adjusted gross income we now have

12. How the deduction works -- Example • The Metropolitan Museum of Art in New York City • If you go there on any given school day, you will see dozens of school children visiting the museum • They do not pay an entry fee – they go there with school groups • They even have their own special entrance and education center • By visiting the museum they learn a lot about arts and antiquities

13. Example cont’d • Thus, many children experience things they would not ordinarily have access to • If they are children of well-off parents, they might already have visited the museum and seen the various collections of arts, such as ancient Chinese calligraphy and painting • But if they are not children of well-off parents, these visits greatly expand their learning experience

14. Example cont’d • In this way the Metropolitan Museum enhances the general well-being of people in New York City • This is an important element of why contributors to the Met, as it is known, should have a tax break • Thus, rich contributors, such as the Rockefeller family, deserve the reduction in their taxes by 50% of the amount they contribute, according to the theory we suggested at the outset

15. Should we examine the theory? • When discussing this in terms of good tax policy for China, we need to think about differences in the systems between U.S. and China • We note the feature of strong state support for the arts and education institutions in China at present • But as there are an increasing number of private arts (museums) and education institutions (private schools and universities), that may change the calculus for China

16. Given those changes • It may well be that there needs to be an examination of the current tax policies for deductions by MoF and SAT -- should they be enhanced? • In addition, as China moves toward the adoption of a gift and estate tax, there needs to be consideration of tax deductions for charitable donations in that context • While it is expensive,we would urge the adoption of the U.S. rules, with perhaps the addition of the French rule on estate taxes (the future Qi Bashis are an example!)

17. Conclusion • In our view the U.S. experience with the charitable contribution deduction is a good system to study for China • It may well be warranted to study other systems, such as the tax credit in Canada -- tax credits above a small floor -- such as $200 -- may be available to all people, while the contribution deduction in the U.S. is not • It is also useful to examine the new tax deduction/credit systems in Japan and Singapore, which are in the Asia region

18. Our humble thanks • Thanks very much for your attention and interest • Thanks very much to the organizers for inviting us • Looking forward to a great discussion • 谢谢!