March 1, 2009
More on Obama's Tax Plan and Charitable Contributions
Harvey Dale, the University Professor of Philanthropy and the Law at NYU and the Director of the National Center on Philanthropy and the Law, e-mailed me some comments on my most recent post about Obama's tax plan and charities, which I share (with Harvey's permission) below. Harvey is one of the founders of the academic legal discipline of non-profit/tax-exempt organizations, and all of us who blog here at the Nonprofit Law Prof Blog owe our careers in part to Harvey's efforts. He has forgotten more about this subject than most of us know, and so I take his comments very seriously.
I disagree with your most recent post on this, not so much because of what you said but because of what you didn’t say. To be clear: I agree that it isn’t certain that a 28% cap will materially chill charitable giving. I do think it will have some marginal impact, particularly since the wealthiest taxpayers tend also to be the most tax sensitive. I am, however, prepared to leave that question unsettled since we don’t have and aren’t likely to have an “accurate” or even “consensus” price elasticity coefficient. Several other factors, however, leave me strongly opposed to the plan to cap the charitable contributions deduction at 28%:
Complexity: all caps and phase-outs add to complexity in the Code. The currently-proposed caps apply not only to the charitable contributions deduction but also to the deductions for state and local taxes and mortgage interest, and perhaps others. Anyone eligible for any one or more of the deductions must consult not only the principal relevant Code section(s), but also the cap section(s), any other phase-out section(s), etc. The task gets ever more complicated, tax return preparers get lost and make mistakes, etc. We should stand up against complexification.
Horizontal equity: caps and phase-outs almost always create inequalities in tax burden for otherwise similarly situated people. For example, consider Mr. A and Ms. B who are similarly situated, e.g., they are single, self-employed, without major medical expenses, etc. Mr. A has $400,000 of taxable income and gives nothing to charity. Ms. B has $500,000 of taxable income before charitable contributions and gives $100,000 to charity. At the end of the day, both are left with $400,000. But Mr. A will pay less tax than Ms. B. (If she understands this, Ms. B is fairly certain to feel it as a punishment for her generosity. I note also that Ms. B can duck this bullet by rolling over to charity $100,000 from her IRA, and perhaps in other ways too so long as she can avoid assignment-of-income problems.)
Dilution of incentive: even if we abandon the proper-tax-base-defining rationale for the charitable contributions deduction (and I wouldn’t abandon it altogether), all agree that the deduction provides a financial incentive or “subsidy” for giving. It’s already very hard calculate the amount of the subsidy (I doubt that even as many as 5% of donors could figure out what the final amount of the deduction will be given the bizarre, baroque rules in the Code). The more complex it becomes, the less clear the incentive. Would anyone really want to say: “I want to change your behavior in X manner, and if you change it I’ll give you a reward . . . but I won’t tell you what the reward will be.”
Economic efficiency: because of the above factors, caps and phase-outs are guaranteed to increase inefficiency in the allocation of economic resources.
Better alternative: it’s so easy to avoid all of the above problems that it’s hard to see why the cap-or-phase-out path should be followed. It would be straightforward, clear, and courageous simply to increase the relevant tax rates. If there were no other path to tread, we might have to grit our teeth and settle for a cap. But here a little candor and courage would be most welcome. It’s certainly easier to draft and implement a rate increase than caps and phase-outs.
I don't disagree with Harvey's observations - in fact, they are pretty similar to what I said in my original post on this subject. I do think, however, that we ought not to destroy the forest to save a few trees. Reforming health care, investing in education and weaning the country off of imported oil are extraordinarily important public policy initiatives. Every aspect of Obama's plan will be subject to some kind of objection; there will always be a "better" way to do it that doesn't involve the particular stakes of the commentator suggesting the better way. The old saw "Don't tax you, don't tax me, tax the fellow behind the tree" will be seen over and over again in this process (except for the Rush Limbaugh crowd, who as far as I can tell would rather just see government disappear completely, perhaps with the exception of maintaining a standing army). All I ask is that those of us in the charitable/nonprofit community keep our wits about us and remember that the long-term gains from Obama's policy goals may well outweigh the adverse effect on charitable giving and tax simplicity. Charities that have employees will benefit from a rationalized health care system that controls costs; poor-relief charities will be able to devote resources to other pressing needs. And so forth. In economic terms, I've made my Kaldor-Hicks efficiency analysis, and the gain seems worth the potential cost. Your mileage, obviously, may vary.
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