Long-term Donation Bunching?
Let’s say you’re a relatively well-off American with an income of $100k and have taken the Giving What We Can pledge to donate 10% of your money to the most effective charities you can find. The standard deduction in the US is currently $12k, which means if you were to donate $10k/year it effectively wouldn’t be tax deductible. [1]
The standard EA suggestion here is Donation Bunching: instead of donating $10k every year donate $20k half the years and $0 the other half. In the years where you donate you itemize your deductions, in the others you take the standard deduction. Considered over two years, $8k of the $20k (40%) is deductible.
But we could do better than that! You can deduct up to 60% of your income if you’re donating cash, so you could have five years of donating $0 and one year of donating $60k. Considered over six years, $48k of the $60k (80%) is deductible. [2]
This sounds great, right? Money donated to effective charities does much more good than money collected by the government, and with a bit of planning you can effectively move 80% of your donations to being pre-tax. But I don’t think it’s a good idea!
Over time people change, and a very common way people change as they get older is to turn inward. You start out as a bright-eyed idealist, enthusiastic about making the world a better place and willing to make sacrifices for what you believe in. Then you burn out working too many hours doing something that doesn’t feel as effective as you thought it would be, or you start feeling a pull to have kids and focus your efforts there, or you just stop feeling so motivated by altruism, or dozens of other things, and after a few years the idea of giving your money to people who need it more still sounds nice but isn’t a priority anymore.
While we don’t have good data on the rate at which this happens, in a small sample about half of people in the effective altruism movement in 2013 were no longer involved five years later. If you think your current self is correct to be altruistic and don’t want to leave donations up to a likely less-generous future person then bunching donations over several years is harmful: the substantial possibility that you don’t actually donate outweighs the tax savings. [3]
(Thanks to someone I talked to at the SSC Boston Meetup for asking me the question that got me thinking about this.)
[1] Specifically, unless you had other reasons to itemize your tax deductions, you would do better to take the $12k standard deduction.
[2] This ignores inflation and investment income, but they aren’t large enough to change the picture much over a ~6 year window.
[3] Depending on your views on discount rates (“how much better is it to give this year than next?”) it might also not be so good.
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It’s worth noting that the possible tax benefits are small compared to the benefit of getting one’s donations matched: https://forum.effectivealtruism.org/posts/9ZRenh6bERDkoCfdX/eas-should-invest-all-year-then-give-only-on-giving-tuesday
On the LessWrong mirror of this post, Jeff_Kaufman replied to my above comment:
I replied:
It still seems like it could be worthwhile in the 2-3 year timeline if you were diligent about setting up good systems. I.e. you could set up a separate savings account that you put your yearly (monthly/weekly?) donation into and then donate every 2-3 years.
For me, at least, I think this would do a lot to decrease the cognitive load and temptation to spend. I don’t do this currently but am thinking about it. If you can truly think of the money as already donated when in the separate account (maybe a wealth front cash account?) this would solve a lot of the problems. I do think I would end up donating significantly less when bunching if I didn’t keep the money separate.
If you’re really worried about value drift, you might be able to use a bank account that requires two signatures to withdraw funds, and add a second signatory whom you trust to enforce your precommitment to donate?
I haven’t actually tried to do this, but I know businesses sometimes have this type of control on their accounts, and it might be available to consumers too.
Interesting idea! Have you looked into this since?
If ~50% of people drift away over five years it’s hard to say how many do over 2-3, but it should be at least 25%-35% [1]. You need pretty large tax savings to risk a chance that large of actually donating nothing.
[1] 13%/year for five years gives you 50%, and I think I’d expect the rate of attrition to slowly decrease over time? 25% for two years and 35% for three is assuming it’s linear.
It seems to depend a lot on what it means for someone to no longer be involved in the EA movement. The relevant alternative in my mind isn’t donating nothing.
Speaking for myself I can certainly imagine not being involved in the EA movement in 2-3 years. It’s a lot harder to imagine myself raiding a dedicated bank account I had set aside for donations. That doesn’t mean it’s not possible, but if use the population estimates of not being in the EA movement in 2-3 years of 25-30% (which seems reasonable) as my own risk, I’d estimate the risk of raiding a dedicated bank account for charitable donations as a fraction of that—maybe 5%. In that case it could be worth it. Maybe I’ll think a little harder about that point if I decide to do it.
I 100% agree with the principal behind your post. The future, including your future identity, is so uncertain that for almost everyone the best time to donate and form altruistic habits is right now. I would only “bunch” if I could do so in a way that allows keeping those good habits.
Note that you could probably make an enforceable contractual obligation to give in bunched donations, which would hedge against value drift.
Any update?
I wonder whether it would be worth building some standard terms for this and trying to make it a thing?
If financially viable, the simplest way is just bringing forward the bunching year. The bunching year doesn’t have to be the last year after all the standard deduction years. Standard deduction year(s) could be after the bunching year if that increases followthrough
Yes, it might be. Feel free to sync offline if you want to investigate this.
Relevant for 2020: Due to the CARES Act, individuals can deduct 100% of their AGI this year.
Another argument against extreme donation bunching: Because marginal tax rates get higher as your income increases, being able to deduct $40K is not necessarily twice as valuable as being able to deduct $20K.
If you expect your income to increase over time (all else equal this is reasonable), that’s an extra reason to bunch. However, it throws a wrench in an alternative to front-load bunching, i.e. give 50% in year 1 and then only 10% of your raise since year 1 in the subsequent four years.