Monday, December 17, 2012
Today's Wall Street Journal features an interesting debate on ending the income tax charitable deduction between Dan Mitchell of the Cato Institute (end it) and Diana Aviv of the Independent Sector (keep it). Although the arguments won't surprise readers already familiar with the scholarly literature on the subject, the two pieces do a fairly nice job laying out the arguments for a lay audience. That said, each commenter makes a couple points that I'd like to see fleshed out a bit.
Aviv leads her defense of the deduction by noting that "limiting it -- or worse curtailing it -- would rob funds from nonprofits at a time when charities are already struggling to meet increased demand for programs and services." She argues that the tax deduction does indeed incentivize giving that would not otherwise take place, pointing to the high percentage of gifts made at the end of December and to the large number of itemizers who take a charitable deduction. (To me, however, these statistics beg the question whether these individuals are being incentivized by the deduction or simply taking advantage of a tax benefit for making gifts they would make without the deduction). In her defense, she doesn't rely on these numbers alone; she also cites the 2010 IUPUI study where high net-worth individuals themselves said they would cut back on giving if the tax incentive were decreased.
Aviv also criticizes Obama's proposal to limit the value of the deduction to 28%, correctly noting that some experts predict a decline in giving from that proposal. She further notes -- correctly, in my mind -- that we should judge the impact of limiting the charitable deduction by the impact on charities more than on the donor. What she doesn't do, however, is try to distinguish which charities will be hurt the most. In my view, for example, a large impact on a soup kitchen should be judged differently than a large impact on the ballet. Lastly, Aviv argues that the charitable deduction is worthwhile because it encourages other-serving behavior instead of self-consumption (in contrast to, for example, the mortgage interest deduction). Again, this is partly true -- a donation to a soup kitchen is other-serving -- and partly not true -- a donation to have a building named after you on your alma mater's campus or a donation to your child's private school are both pretty self-serving.
Mitchell's main argument is that the best way to help charities is to have a strong economy. He notes, for example, that the tax rewards for charitable giving have fluctuated drastically over the years but that giving stays relatively constant at about 2% of GDP. Mitchell also criticizes the deduction for mainly benefiting those with incomes over $100,000. (To me, this alone isn't doesn't help evaluate the fairness of the deduction. If poor people are kept from going hungry or homeless because of the deduction, then the fact the well-off get a tax break may be worth it. But if the well-off get a tax break and it has no affect on the plight of the poor, that's a different story).
Mitchell then focuses on the other incentives for charitable giving, arguing that cultural pressure, perks like naming opportunities, and altruism would motivate the same level of giving. He also takes issue with the surveys where donors state that their giving will drop, noting that year in, year out, giving stays about the same. I tend to agree with these arguments, but then I part ways somewhat with Mitchell toward the end of his piece. He argues that because a dollar gift only costs the donor 65 cents, donors become lazy and don't monitor charities to make sure their funds are used wisely. While the extent to which donors pay attention to how their dollars are spent varies among donors, I haven't seen any evidence that non-itemizers are more careful with their giving dollars than itemizers in this respect, or that those in lower brackets are more careful than those in higher brackets. He also criticizes charities for being inefficient and for having overly high marketing expenses. While some charities certainly are inefficient, that seems to be more a product of the non-distribution constraint than the charitable deduction, and I doubt that charities that spend too much on marketing now would spend less if giving became more expensive.
More thoughts on this particular debate tomorrow.
Miranda Perry Fleischer