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Thursday, April 18, 2013

Measuring Generosity

In Why the Rich Don't Give to Charity, Ken Stern writes that with all the attention given to donations from wealthy people, "you would be forgiven for thinking that the story of charity in this country is a story of epic generosity on the part of the American rich. It is not." Stern notes:

One of the most surprising, and perhaps confounding, facts of charity in America is that the people who can least afford to give are the ones who donate the greatest percentage of their income. In 2011, the wealthiest Americans—those with earnings in the top 20 percent—contributed on average 1.3 percent of their income to charity. By comparison, Americans at the base of the income pyramid—those in the bottom 20 percent—donated 3.2 percent of their income. . . . [S]ome experts have speculated that the wealthy may be less generous—that the personal drive to accumulate wealth may be inconsistent with the idea of communal support.

Of course, Stern's argument requires us to view generosity in subjective terms. Given that the 80th percentile in income in the U.S. is about 5 times that of the 20th percentile, the top 20% is surely donating far more dollars than the bottom 20%.

So what is the best way to measure generosity? It depends. If you are deciding whether to focus your fundraising efforts on the top quintile or the bottom quintile, you should probably focus objectively on dollars and choose the top quintile. Similarly, if you are choosing a career and want to maximize your charitable giving, you should focus on your ability to give dollars even if doing so reduces the  fraction of  your total income you will later give.

If, however, we're considering how much giving "hurts," percentages of income capture some useful information. But they are still rough proxies because we  don't necessarily experience the "hurt" of giving in percentage terms. From a purely subjective perspective, it may hurt the average rich person a lot less to give 3% than it hurts the average poor person to give the same percentage. After all, the rich have already taken care of their basic needs for food and healthcare before they open their wallets. But research could support the opposite conclusion: maybe it hurts the average rich person more to give a given percentage. That would be one explanation for the findings Stern discusses. 

To make all of this even more accurate, we should control for tax incentives to donate that depend on wealth. We should also control for "charitable donation substitutes." Two effects stand out: First, rich people may view a significant portion of their taxes as charity. Whether a person addresses the healthcare needs of the poor through taxes or through a private donation, they might think, does not entirely change its charitable nature. True, the tax expenditure is compelled. But some rich people may reduce their charitable donations because they believe, correctly or incorrectly, that they are already making substantial  donations by paying their taxes. Second, people give not only money but also time and energy either to formal charities or to friends and families in need. I don't know how such behaviors compare between rich and poor, but poor people may give much more in this respect than rich people. And I'm sure I'm only scratching the surface of the complex issues raised here.

The subjectivity of generosity aside, there is an even more important issue about how to measure the good that donations actually accomplish. Stern offers this interesting tidbit:

Of the 50 largest individual gifts to public charities in 2012, 34 went to educational institutions, the vast majority of them colleges and universities, like Harvard, Columbia, and Berkeley, that cater to the nation’s and the world’s elite. Museums and arts organizations such as the Metropolitan Museum of Art received nine of these major gifts, with the remaining donations spread among medical facilities and fashionable charities like the Central Park Conservancy. Not a single one of them went to a social-service organization or to a charity that principally serves the poor and the dispossessed. 

(Cross-posted to the Petrie-Flom Center's Bill of Health Blog)

Posted by Adam Kolber on April 18, 2013 at 07:14 AM | Permalink

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I find it neither particularly surprising nor confounding that the poor give more to charity than the well-off. My hunch is that the poor better understand the marginal benefits of an extra few dollars better than the well-off, whether because they or someone they know has received assistance in a time of need. As a result, when they find they have an extra few dollars of their own and are confronted by the needs of others, they feel compelled to transfer their "extra" dollars to the person they perceive to be needier than they.

I'd also guess that the poor give more money to social-service organizations and are less likely to give to the MET, etc.

Posted by: Matthew Bruckner | Apr 18, 2013 7:50:54 AM

Your hunch sounds very plausible.

As an aside, when you say you're not surprised "that the poor give more to charity than the well-off," you're adopting a subjective interpretation of "giving more." I suspect that's probably the more common interpretation.

Posted by: Adam Kolber | Apr 18, 2013 9:01:11 AM

This indicates that limiting the charitable deduction to itemization is a "regressive" tax. Any discussion of capping the charitable deduction should allow folks to take the deduction "off the top." This would allow lower and middle-income donors to take the deduction.

Posted by: AndyK | Apr 18, 2013 9:10:54 AM

Adam, always nice to see someone other than me write about taxes & charity at prawfs, especially if they're interesting and informed. A couple of points. First, note that Stern conflates wealth with income: he defines the "wealthy" as those in the highest income quintile. That isn't right. Retirees donate a lot, and they have low incomes but high wealth. Indeed, the billionaire who is paying his bills by borrowing against unrealized appreciated gains has zero (taxable) income.

But still, in general it's mostly right that lower-income households donate a higher percentage of their income. Most of that money goes to churches and social-service organizations. (The Indiana Center on Philanthropy is the go-to source for giving by income group, for those interested.) This implies, contra AndyK, that changing tax policy to reward low-income givers would likely be a waste of money. These are people who are giving out of conviction or group affiliation, not tax incentives. If that makes the tax system more regressive, then change the rates so that rich people pay more before deductions.

Posted by: BDG | Apr 18, 2013 9:33:11 AM

Thanks, Brian! That's a good point about income and wealth. It reminds me of how frequently entities determine creditworthiness (e.g., landlords) by focusing almost exclusively on income, even though wealth would seem to be very important as well. (Maybe questions about wealth are viewed as more intrusive.)

Posted by: Adam Kolber | Apr 18, 2013 9:45:13 AM

"This implies, contra AndyK, that changing tax policy to reward low-income givers would likely be a waste of money. These are people who are giving out of conviction or group affiliation, not tax incentives."

Oh, I wasn't talking about responsiveness to incentives, but that the deduction is applied regressively. These donations might be inelastic---wonderful. The unavailability of the deduction still penalizes the poorest among us.

Further, on the substance of "to whom" people donate--- group affiliation is probably a more rational donation than a major gift to Harvard simply out of a desire to have one's name on a chair. Why should we be incentivizing the latter in a different way from the former?

Without having the data right in front of my, my intuition is that a household earning the median US income, around $50,000 per annum, will usually NOT be able to deduct their donations, because they will not be itemizing.

This could be described as a sort of transfer payment from low-to-middle income earners to Harvard. My point is that any discussion of amending the charitable deduction should seek to extend it to lower-income earners as well, out of fairness.

Posted by: AndyK | Apr 18, 2013 11:52:47 AM

AndyK, agreed that deductions tend to be worth more for high-earners. My point was that you can offset that effect by making overall rates more progressive, rather than by giving deductions to infra-marginal donors. We have quite a bit more on that and related design questions in Colinvaux, Galle, & Steuerle -- available at an Urban Institute web site near you now...

Posted by: BDG | Apr 18, 2013 4:15:22 PM

That's really interesting (but I guess not surprising) that top charitable gifts go to universities, and ties really well into something I am writing now; thanks for the post.

Posted by: Margaret Ryznar | Apr 24, 2013 12:19:59 PM

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