Monday, January 31, 2011
An op-ed piece in the Nonprofit Quarterly makes a compelling argument for eliminating the charitable contribution deduction and replacing it with a credit:
I completely and totally support the proposal for broad base tax reform that includes getting rid of the charitable deduction for giving. Seventy-one percent of Americans receive no tax benefit for their giving because they don’t exceed the standard deduction and they file a short form. One of those 71 percent is my mother. She owns her house free and clear and has no other deductions so despite the fact that she gives often and generously, close to or surpassing the Biblical 10 percent, her tax bill is not reduced.
Contrast to someone I know who earns $250,000 per year, gives at most $2,000, declares all of it and proudly announces “It only cost me $1,200.” Richard Thaler, writing in the Dec. 19, 2010, edition of the New York Times, calls this, accurately I think, a tax subsidy. The government is subsidizing wealthy people’s giving while ordinary people (the majority of people) get nothing.
Of course many charity leaders are squawking that getting rid of the charitable deduction will be another body blow to nonprofits. In fact, it will be a minor scratch to the people who receive tax benefits for giving. And one such person who receives tax benefits for giving is me. I own a house, I have a mortgage deduction (which I also think should be abolished) and my partner and I give away 5 percent to 10 percent of our income. I am more of a hypocrite than my dentist friend so I have always declared my giving.
I am not so sure of the argument. It has surface appeal and may very well be correct; it does seem unfair that the deduction is worth more to wealthier taxpayers than to poorer taxpayers. But that seems an inevitable consequence of progressive rates. Unless we either eliminate all deductions or adopt a flat tax, the regressivity of deductions will always be present. We might reduce the regressivity by permanently allowing the charitable contribution above the line but it will still be worth more to the higher earners. A credit is fairer, particularly if it is capped, as most credits are -- or perhaps even retains progressivity since a $2500 credit means less to the wealthy than to the less wealthy -- but ultimately it will increase the tax burden on everybody. Which is to say that a credit essentially places the government in the shoes of the donor. I can't quite put my finger on it, but something about that bothers me. If the government pays wealthy people 100% on the dollar donated, the wealthy will have disproportionate influence over the characteristics defining the charitable sector. I'm thinking aloud here so don't hold me to the argument. It may be the case already that the wealthy already define the charitable sector.