Monday, January 31, 2011

The Charitable Contribution Deduction Must Go, says Nonprofit Quarterly Op-Ed

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.


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If "the wealthy already define the charitable sector," that's not because of the charitable contributions deduction. Neither Bill Gates nor Warren Buffet can ever hope to use much of the deduction for the gifts they have made to charity because their income is much too small in comparison with the amounts donated. And many of the great foundations that were created in the early part of the 20th century were formed prior to the existence of any charitable contributions deduction (and mostly before the enactment of the income tax). To the extent that the wealthy dominate the charitable sector (and I don't think they actually either dominate or "define" it), that's because they have more assets to deploy. I don't think the charitable contributions deduction has much to do with that.

Posted by: Harvey Dale | Feb 1, 2011 5:48:32 AM

It is a characteristic of the American culture to help those less fortunate than themselves. This can be seen throughout our history. Communities coming together to help people who have suffered loss through fire or flood or other circumstance. It seems fitting that the charitable deduction should be part of our tax code. For the government to eliminate this deduction is to declare that the government does not support charitable giving. If the government is does not support charitable giving, then the government should stop the charitable giving that it does. How many billions of dollars does the federal government give away each year both at home and abroad. If the government wants to cut the deficit by eliminating the charitable donations deduction that let them eliminate the charitable giving that the government does.

It seems that the move to eliminate the charitable donations deduction is just a ploy by greedy politicians to get more of our money. They do not want us to give to charities of our choice; they what to get more of our money so they can give it to charities of their choice.

Some may try to claim that the deduction only helps the rich, but all the charitable donations that I give go to the poor. If the deduction is eliminated then charitable donations will be greatly reduced and it is the poor who will suffer.

Some have said that there is a lot of fraud in the charities. If that is the case then clean up those fraudulent charities. If fraud is the issue, what about all the medicare fraud that we hear about on the news. Should we eliminate medicare because of the amount of fraud that goes on. That would save the government a lot more money that eliminating the donations deduction.

Another part of the American culture is that America is the land of opportunity. If you work hard you can get ahead. Politicians have been spreading the rumor that the rich are the bad guys and should be taxed out of existence. They seem to ignore the fact that it is the rich factory owners and store owners that provide jobs for the people who are trying to get ahead. By continually attacking the rich, they are telling you that it is no use trying to get ahead because if you succeed then we are going to take all you money in taxes.

It is time to carefully consider the issues and not just follow the rhetoric of the politicians.

Posted by: bill hurley | Jan 3, 2012 8:03:41 PM

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