Should charity be tax deductible?

by Russ Roberts on September 6, 2007

in Charity

Interesting piece in the NYT on the bang for the buck that comes from the deductibility of charity:

The rich are giving more to charity than ever, but people like Mr.
Broad are not the only ones footing the bill for such generosity. For
every three dollars they give away, the federal government typically
gives up a dollar or more in tax revenue, because of the charitable tax
deduction and by not collecting estate taxes.

Mr. Broad (rhymes
with road) says his gifts provide a greater public benefit than if the
money goes to taxes for the government to spend. “I believe the public
benefit is significantly greater than the tax benefit an individual
receives,” Mr. Broad said. “I think there’s a multiplier effect. What
smart, entrepreneurial philanthropists and their foundations do is get
greater value for how they invest their money than if the government
were doing it.”

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{ 17 comments }

Randy September 6, 2007 at 12:25 pm

I'd say drop the whole idea of charitable donations and roll it all into the rules concerning gifts. If I understand correctly, any amount over $12 thousand per year is considered income to the recipient. That is, tax the recipient and not the giver. It is true that charitable organizations intend to do something good with the money they recieve, but hey, don't we all.

MT September 6, 2007 at 4:06 pm

I think the Times is becoming a very strange organization. Much of their arts listings would be eviscerated and many of their readers would lose their jobs if charitable deductions were eliminated. Further, could there be anything more ludicrous than implying government would (as opposed to could) do something more useful with the money? Finally, how could they address that topic yet ignore the far bigger drain effected thru donations to fundamentalist religious groups? It seems the real agenda of the Times is becoming "attack wealthy people" for reasons that escape me.

K September 6, 2007 at 4:27 pm

Absolutely. Get rid of the deduction. It is abused. I haven't followed tax law details since I retired but a few years ago fake appraisals made it a great tax dodge.

Anything other than cash donations should certainly not be deductible.

How a person decides to spend his money should not be a factor in raising revenues.

Simon Clark September 6, 2007 at 4:57 pm

I think the damage that tax exemption for employees halthcare plans has done to healthcare in the US should be enough warning about the dangers of such things.

Jim September 6, 2007 at 5:07 pm

It is likely that huge gifts (like those of Mssrs. Broad, Gates and Buffet)are made with appreciated capital assets. As a result, the capital gains tax of up to 15% is avoided why the charitable deduction saves 35% in taxes. Thus the tax savings approaches 50% of the value of the gift.

Since the estate tax would otherwise for such individuals take 45% of the value, the "cost" to the giver is quite a small price for the personal satisfaction obtained. I guess the real economic question it whether the distribution of the assets (50% government, 50% heirs or 100% charity, negative 35% government (of which 45% comes back to government and 55% goes t heirs) is better to society as a whole one way or the other.

HWinVA September 6, 2007 at 7:31 pm

for Randy — for federal income tax purposes, a gift is never income to the recipient.

You may be confusing this with a gift tax that may be payable by the giver of a gift under certain circumstances.

(When I took the Pennsylvania bar 20+ years ago, there was a tax question which came with a lot of space to write the response: "A receives a bequest of one million dollars from B. What are the federal income tax consequences for A?" The correct answer was "none"; my guess is that many examinees did not have the nerve to write that.)

HWinVA September 6, 2007 at 7:32 pm

for Randy — for federal income tax purposes, a gift is never income to the recipient.

You may be confusing this with a gift tax that may be payable by the giver of a gift under certain circumstances.

(When I took the Pennsylvania bar 20+ years ago, there was a tax question which came with a lot of space to write the response: "A receives a bequest of one million dollars from B. What are the federal income tax consequences for A?" The correct answer was "none"; my guess is that many examinees did not have the nerve to write that.)

Randy September 6, 2007 at 9:02 pm

Thanks, HWinVA.

Lowcountryjoe September 7, 2007 at 7:45 am

The advantages of private charities providing services rather than the federal government doing it are enormous. The best benefit is that private charities can discriminate in who (or what causes) they give to. And, if the charity get the giving wrong in the public's eye, it will find it much more difficult to receive additional future contributions. The other great benefit is that more money, typically, gets to the cause/beneficiaries and does not get lost/eaten in a massive bureacracy.

Randy September 7, 2007 at 7:59 am

I agree, Lcj. The real issue is efficiency, and it almost certainly is more efficient for the funds to go directly to the professionals than to be funneled through (and siphoned by) the buracracy. Perhaps what is needed is simply a review of the list of qualified charities – assuming of course that the goal is charity and not patronage.

Clay September 7, 2007 at 9:54 am

In the article, Standford professor Rob Reich claims "the government is subsidizing a system that enhances inequities between poor and wealthy public schools, Professor Reich said."

Yet, not taxing a sector is not the equivalent of subsidizing, which implies a distortionary kick-back. Nor does the example of differences between contributions to two schools' foundations suggest a system of inequality — Because one school in California has a superior development arm in its foundation than another, we should conclude that students from rich families are disproportionately benefiting from philanthropy than those from poor?

Surely public funding of schools based on local property taxes isn't more of a culprit.

Bob September 7, 2007 at 4:02 pm

Clay,

You touched on the most frightening issue to me: the use of "subsidizing" to refer to not taxing. Talk about entitlement.

Is anyone else scared of the attitude the Times has that the "public" (whoever that may be) is entitled to everyone's money and only by the magnanimity of the government (i.e. "subsidies") do individuals get to spend their money how they see fit?

It's like Bertram Scudder exists and he writes for the Times. "It's for the public good!"

Henri Hein September 7, 2007 at 8:50 pm

All deductions should be eliminated.

As long as we have deductions, it seems to me charitable contributions should be near the top of the list.

Sean September 9, 2007 at 2:08 pm

Let me see if I have this correct, abolish the tax incentive for corporations and wealthy individuals to give to private charities allowing the government to keep it, and the government will better understand how to spend that money than the people who have the money? Do the newspaper writers live on the same planet that I do?

Mike September 10, 2007 at 11:53 am

My feeling is that it is incredibly arbitrary that monetary donations are deductible, but donations of time and effort toward charitable causes are not. This also puts the poorer citizen at a disadvantage. It is also a roundabout indication on the "value" the government places on household production versus production for exchange. If I were completely self sufficient, I would pay no tax on the clothes I made, or the food I grow. However, if I drive a truck for a living and use those proceeds to buy clothes and food, I then am liable for the tax. Where is the justification for this differential treatment?

Lewis September 12, 2007 at 9:46 am

I'm no NYT regular, but I agree that the donation should be significantly curbed. I donate to charity myself, but I recognize there's a massive range in what charity dollars accomplish. For example, I donate to a foundation that buys medicines and health care for impoverished children in third world countries. I'm confident that each year, my donations prolong the lives of several children.
However, I could receive the same tax donation if I helped Middlebury college revamp their library, even though the college already owns its own ski resort. It's my opinion, although I'm not statistically certain, that the vast majority of charity deductions are for the latter type of charity- the arts, symphonies, colleges, 'community foundations,' things that promote things for which the giver has a personal consumption preference, rather than directly improving quality of life.

Bill September 18, 2007 at 10:25 pm

Sean,

Regarding your truck driver analogy, the difference is that wealth is generated through trade/exchange (see comparative advantage), and the government skims that additional wealth.

And I'd assume the reason the government doesn't allow deductions on time is because not everybody's time is equally valuable. However, the only way to know the value is via a monetization of that time by the market. Maybe some kind of formula could be created, i.e. a function of income and hours worked. On the face of it that seems unwieldly. Still, I agree there its rather unfair; as a dishwasher I'd personally rather donate time at an NGO, than work additional hours washing dishes and transfer the money (assuming I decided to make that choice).

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