Monday, December 20, 2010

Richard Thaler on Rethinking the Charitable Contribution Deduction

On Sunday the NY Times published a piece by Richard Thaler (University of Chicago Booth School of Business) titled "It's Time to Rethink the Charity Deduction."  Assuming both that charitable giving is worthy of government support and that tax benefits for such giving constitute a subsidy, he identifies the major odd aspect of the current deduction, which is that it provides a greater benefit for giving by high-income taxpayers both because of the progressive income tax structure and the existence of the standard deduction.  On the latter point, he notes that the current deduction tends to favor donations by taxpayers with large mortgages (or large state and local tax bills), because having a large mortgage - and so large mortgage interest deductions - makes it more likely the taxpayer will itemize their deductions.  he ends by proposing that Congress change the current support for charitable contributions to a tax credit that would apply only to contributions that exceed a floor (say 2 percent of adjusted gross income) and that is relatively low (say 15 percent).  Such ideas have been tossed around by legal scholars for many years, but the current budget crisis and related push for meaningful tax reform before the extended Bush tax cuts expire at the end of 2012 may provide real impetus for such a change in the near future.


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