Wednesday, July 20, 2011

Sauce for the Goose: Why True Conservatives Should Swap Lower Marginal Rates for an End to Charitable Deductions

Just now we overheard an overheated radio host say that reducing or ending the tax deduction for charitable donations would make people more dependent on government.

A couple of weeks ago, at what purported to be a roundtable discussion of influential local conservatives, we heard nothing but fear and loathing for any reduction in the charitable deduction.

Conservatives should not think this way. Or maybe they just aren't thinking.

Is this heresy? No, it's free-market gospel. Not for profits would be better off without the charitable deduction. Follow our immaculate reasoning, gentle readers!

First, nobody who can do math gives charitably simply for a deduction. Even if you're taxed to the max, the deduction is always worth less than what you gave away (deduction's value = gift x marginal tax rate [which is well less than 100%]). People give because they want to. The deduction makes it cheaper, doubtless creating more giving, but the deduction doesn't motivate giving as such. Givers would still give without the deduction. Maybe not all givers, but certainly most; maybe not as much, but certainly still a lot. Just ask them.

Second, if people have more to begin with, they'll generally give more. Reducing marginal tax rates would put more money in people's pockets. If marginal tax rates are reduced while charitable deductions are reduced on a more or less dollar-for-dollar (revenue-neutral) basis, the reduction in gifts because of the deduction's phase-out could be offset by the effect of growing take-home income on generosity. And since reducing marginal rates historically has fueled economic growth, the extra-income dividend to charities may even be greater than otherwise.

Third, deciding and tracking what's deductible and what isn't is a big problem and a big expense. Charities engage in all kinds of subterfuge to stay legal while adhering to donor interests (e.g., gifts received for an individual's support are generally received with a weird work-around on the restriction that deductible gifts can't be given directly to benefit an individual). The charitable deduction is the primary problem in drawing the line between political and religious or other tax-deductible activity in many organizations. It's the primary problem for NPOs incorporating, as the IRS regulates such organizations with a view to protecting the integrity of the charitable deduction. It has led to the formation of bogus "churches" to which some dopes contribute their income so that they can collect (tax-deductible) housing allowances as clergy in their self-formed congregation of self-worship. Everyone would save dough if this were eliminated, legitimate charities most of all. Plus, everyone would save some integrity. Say farewell to the tax-shelter charity, America!

Fourth, there's every likelihood that the charitable deduction keeps alive some marginal NPOs that would otherwise disappear. We think that's not such a bad outcome. Who wants to justify every 501 (c) 3 organization's existence? Many need to merge, be taken over, or liquidate.

Fifth, it's hardly consistent with robust conservatism, opposed as it is to dependency on government patronage, to consider the charitable deduction necessary for the sustenance of those who do good through the gifts of those who do well.

OK, everybody. Let's show that thoughtful, charitable conservatives can buck the trend and lead the way on renouncing special-interest politics. Write your congressman today and insist that the charitable deduction be eliminated in what we hope is the impending round of tax reform.

"We have nothing to fear but fear itself!"


JB in CA said...

Even if you're taxed to the max, the deduction is always worth less than what you gave away ... .

Well, that's true of money, and real estate, and such, but what about those old clothes that no longer fit or that old couch that doesn't match the new carpet? They're basically worthless to the person who has them, and it's (often) too much trouble to go around finding someone who could use them. So why not just throw them away? In my own case, the answer's pretty simple. The tax deduction I get from the IRS is more than worth the effort it takes to haul them over to the Salvation Army. So not only does the deduction encourage me to do a good deed for those who could use my old items, it discourages me from wasting so much.

Jon A. Alfred E. Michael J. Wile E. SWNID said...

We too take every advantage of the generous allowances for donations of used goods (remember Hillary's deductions in Little Rock for donating used undies?). We enthusiastically use Intuit's free "Its Deductible" application for valuing such donations. However, we venture the educated guess that less than 10% of those who donate to the Sally Ann and their ilk ever claim a penny of it on Schedule A. So we persist in thinking that the long-term macroeconomic downside of phasing out the charitable deduction will be inconsequential.

Anonymous said...

Acctually, giving old items to Goodwill or the Salvation Army for a tax right off is more of a reason to end the Charitable Deduction. It most likely will reduce what these organizations take in but the items they receive will be of better quality. I have seen more than once where people will take what couldn't be sold at garage sales for quarters, dimes and pennies and give it to Goodwill. What ever happen to giving of your best. Fraud happens less when you remove ways to be defrauded. Keep it Simple.

Jon A. Alfred E. Michael J. Wile E. SWNID said...

If a shortage of used goods ever arises, we can always enact a "stimulus."