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Private Philanthropy andPublic Finance William Vickrey FORMS OF FISCAL SUPPORT FOR PHILANTHROPY Fiscal support for private philanthropy can take a number of forms. These include the making of outright grants to private philanthropic agencies, assignment of parts or all of certain revenues, exemption of philanthropic institutions from various taxes on property used or on transactions involved in their activities, exemption from taxes on investments, the proceeds of which are devoted to philanthropic activities, exemption from estate, gift or inheritance tax of amounts contributed to such philanthropies, and the granting of credits or deductions for charitable contributions under individual and corporation income taxes. These measures have varying impacts on philanthropic activity and have been justified in various ways; the pattern of such subventions has also varied widely from time to time and from country to country. The results have often been unanticipated and at times perverse. INCOME TAX DEDUCTION, INDIVIDUAL One of the most important of the concessions made to philanthropy is the deduction allowed for charitable contributions in the personal income taxes of the United States, including most state income taxes, and in some other countries. The deduction allowed under the U.S. federal income tax law was first introduced beginning with the income year 1917, concurrently with an increase in the top bracket rates from 15 percent for 1916 to 67 percent for 1917 as a war finance measure. The amount of the deduction was then limited to 15 149 150 • ALTRUISM, MORALITY, AND ECONOMIC THEORY percent of net income, somewhat more than the traditional. "tithe," but the scope of the provision has been gradually expanded over the years, both by legislative enactment and by interpretation. The first explicit enlargement came in 1924 with the addition of the so-called nun's clause, whereby taxpayers meeting fairly stringent conditions of giving substantially all of their income to philanthropic agencies during the past five years would be allowed to deduct their contributions without limit. This was intended as quasi-personal legislation designed to deal with the special case of a nun who had in fact taken vows of poverty and created a situation where tax was due but there was no income available net after contributions with which to pay it. COMPOUNDING OF THE DEDUCTION The principal enlargements, however, have arisen more or less without explicit legislative enactment through interpretations of the provisions relating to the taxation of capital gains and the' inventiveness of taxpayers and their counsel in taking advantage of these provisions. The main element in this process has been the interpretation of the gift of securities or other property as a gift of the current market value of the property given, in itself a reasonable enough interpretation, but in combination with a failure to recognize any realization of capital gain on the transaction, this amounted to a substantial double allowance where the property given had appreciated substantially in value in the hands of the taxpayer. Thus the gift of an asset having a "basis" (e.g., cost) for tax purposes of a fraction b of its current market value A would not only result in a reduction in capital gains tax of A(1-b)g, g being the effective rate on capital gains, but in addition a reduction in tax by reason of the deduction of the contribution A amounting to rnA, m being the marginal rate on the top bracket of the taxpayer's ordinary income. The total tax saving, as compared to the result if the asset had been sold outright for A would thus be A(m + g - bg) which in favorable circumstances could be greater than A, giving rise to the rather astonishing result that if a taxpayer is desirous of liquidating his investment in an asset with a relatively low basis b, he might actually obtain a greater net realization for himself by giving the asset to an eligible charity than by selling the asset outright and retaining the proceeds. In such cases it is not only more blessed, but more profitable, to give! Not content with this, some top bracket taxpayers having assets with relatively smaller accrued capital gains made a practice of "giving the gain," i.e., transferring the asset to the charitable organization in a "bargain sale" in return for a payment equal to the basis, entitling themselves to a charitable contribution deduction equal to the excess of the market value over this sale price, and again escaping any assessment of tax on the capital gain. In this...


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