Do we have any lawyers here at LessWrong?
Idea:
Would it be possible to legitimately write some sort of standardized financial instrument that functions as a loan with no repayment date, with options for conversion into charitable donation?
Speculations (non-lawyer here) —
(1) Maybe there's something equivalent to a SAFE Note (invented by YCombinator to simplify and standardize startup financing in a way friendly to both parties). It seems like a decent jumping-off point:
https://en.wikipedia.org/wiki/Simple_agreement_for_future_equity_(SAFE)
(2) On the other hand, there's a variety of mechanisms where you can't just do clever stuff. And there's a variety of arcane rules. You can, I think, donate property that's appreciated in value without paying capital gains first for instance, but maybe there's specific definitions around the timing of cash flows, donations, and deductions?
(3) On the other-other hand, seems like American tax policy in general is very amenable to people supporting worthy charitable causes.
(4) On the other-other-other-hand, you'd have to make sure it's not game-able and doesn't result in strange second-order consequences.
(5) And finally, if it's ambiguous, it seems like the type of thing where it'd be possible to get some sort of preliminary ruling from the relevant authorities. (Presumably the Treasury/IRS, but maybe someone else.)
Seems like a good idea though? If someone donates $10k a year for 5 years, it seems reasonable that they'd be able to write off that $50k at the end of the end of 5 years.
I don't know much about this, but one thing that comes to mind is that if it's optional (which I think it has to be to postpone the effective date of the donation?) then what happens if the 'donor' doesn't choose to convert it to a donation?
then what happens if the 'donor' doesn't choose to convert it to a donation?
Same thing that happens when you fail to meet the requirements for any other financial instrument. You go into debt, your credit rating takes a plunge, and debt collectors will start harassing you for money.
I suspect that people who've already been involved for a while are more likely to still be involved five years later. So perhaps people should initially donate yearly, and then at some point switch to batched donations.
(But I still wouldn't advise this. For one thing, I also expect people are more likely to drop out if they haven't donated anything for four years, especially if the extra money has just been sitting in a big pile with the rest of their money and will feel psychologically painful to lose.)
The same reasoning also says to take out loans to bunch the donation now rather than later, to align your future self with your present self because paying off your loans is in your own best interest.
Hmm I actually think there might be a psychologically optimal idea close to this.
Let’s say you expect to earn $200k/yr for the next 10 years and you want to donate 10% of your income to charity, which is $20k/yr over 10 years, which has a net present value of about $100k. Sell someone an Income Share Agreement (ISA) for $100k which you donate now, then pay the ISA 10% of your income for 10 years.
This could be, like you say, a good commitment mechanism for your present self to get the upper hand over your future self. The ISA protects the downside risk of having a loan you can’t pay if your income unexpectedly decreases.
It's also inconvenient for charities to have variable income streams instead of dependable donors (altho this is a risk you'll be facing anyway if someone is frequently re-evaluating donation targets), but you can work around this by having a donor-advised fund. Donate to the fund in year 1, collect the deduction, and this disperse money from the fund at a constant pace each year (until you hit year N, at which point you donate again).
The charity could also do this itself, right? Take money, don't some of it yet so it has something to spend tomorrow.
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
I'm pretty pessimistic about GivingTuesday persisting as a way for EAs to have a large counterfactually valid impact. "Free money for sufficiently quick and organized folks" won't last.
I agree, which is why the large benefit of getting one's donations matched compared to the tax benefits of bunching provides another (stronger) reason (in addition to the value drift reason) for people like the GWWC-donor in your original post to donate this year (on Giving Tuesday) rather than bunch by taking the standard deduction this year and giving in 2020 (or later) instead. (This is the implication I had in mind when I wrote my first comment; sorry for not writing it out then.)
I myself am in this situation. As such:
Proposal: Five friends in this situation write $10k checks[1] to a sixth. They all have a long chat about their altruist values and beliefs. The sixth donates $60k to a variety of EA causes.
Question: Just how likely / unpleasant would the ensuing IRS audit be?
(There's also a micro-donor-lottery version of this, except the individual contributions are personal gifts and the full $60k is a charitable donation.)
[1] Actually, you want this to be something like $7k, since the tax deduction from donating is worth [your marginal income tax rate] on the amount, roughly 30%. Formally, $10k less the tax benefits from donating $10k.
This 'works' except for the fact that any sort of enforceable contract (that, in year 6, it will eventually get around to you) will mean they are no longer gifts (and thus aren't considered personal gifts underneath the relevant threshold). But even if it doesn't get around to you, this is an improvement over not having anything to deduct yourself.
On the other hand, the social expectation of "I gave to you in your year, you can't back out now!" is a strong commitment device.
I also think that if the "sixth friend" donates $10k in line with each other friend's values and beliefs (as a result of social expectation, not contract), then there's no particular benefit to being the one who has to handle the money, and you don't need to trust in multi-year commitments.
Why not instead: The $10k/year donor instead writes the $10k check to a friend who is already planning on itemizing that year and that friend then donates an amount equal to ($10k + the additional tax benefit they receive) such that that friend's after-tax income is the same.
Your suggestion is correct, though it seemed too messy (and nonessential) to explain for the sake of an off-the-cuff proposal. I added a footnote to clarify this above, though.
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.
It seems like this should be done as a calculation rather than moving directly from words to a course of action.
Are you saying you want an explicit calculation comparing the tax gains from bunching to the risk of never donating? The exact calculation will depend on people's individual financial circumstances, but for the cases I've looked at, it comes out strongly against long-term bunching.
For example, consider someone earning $100k in MA and donating 10%. They have ~$5k in MA tax which they could potentially deduct if itemizing, but let's say no other deductions. Six year bunching would be five years of donating $0 and taking the $12k standard deduction, and then one year of donating $60k and deducting $65k. This moves your year six federal income tax from $15k to $3k, saving you $12k in taxes on $60k in donations or 20%. That is clearly not worth a 50% chance of donating $0.
While people should consider their own tax circumstances and propensity to stop being altruistic, I think we should have a community default of "donate as you go, to a donor-advised fund if need be".
Are you saying you want an explicit calculation comparing the tax gains from bunching to the risk of never donating?
I don't disagree with your conclusion, I haven't done the math yet. (Perhaps I should post a longer algorithm/closed form solution, or code up a widget.) It was a general nitpick regarding process, on a great post.
Six year bunching would be five years of donating $0 and taking the $12k standard deduction, and then one year of donating $60k and deducting $65k.
That is clearly not worth a 50% chance of donating $0.
Could bunching be implemented in a different order? Donate the 60k in year one, then 0 the following 5 years?*
I think we should have a community default of "donate as you go, to a donor-advised fund if need be".
That seems like a reasonable default. Is there a particular fund you had in mind?*
*I don't know much about this area. Prior to reading this post I'd never heard of donor-advised funds before. If these are basic questions I'd understand after reading a book on the subject, I'd appreciate recommendations.
It was a general nitpick regarding process
In this case I'd done the rough math before posting to make sure it was in the right range, but as someone reading the post there wasn't a way for you to know that ;)
Donate the 60k in year one, then 0 the following 5 years?
Sure, except extremely few people on a $100k salary who start wanting to donate 10% will have $60k in savings-they-can-do-without sitting around.
Is there a particular fund you had in mind?
Have a look at https://80000hours.org/2013/06/how-to-create-a-donor-advised-fund/ For comparing DAFs the main thing is to look at the fees and pick a cheap one, since it's the same product everywhere. I know people who've used Vanguard and Fidelity.
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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