Somebody more generous than I once said "it is better to give that to receive." Whether or not that is actually true in an emotional or ontological sense, it is certainly true in a tax-break sense. Wages you receive in exchange for work are taxed. Charitable givings are tax deductible.
Gene Steuerle from the Tax Policy Center praises a new rule that allows Americans to deduct donations to Haiti on their 2009 or 2010 tax returns. I agree that it's a perfectly good idea to encourage people to donate to charity. I also agree that allowing taxpayers to itemize charitable donations and deduct them from their taxable income is a perfectly good way to inject charity into our tax system.
But that charity might be under siege . Take a look at the last two major tax reform plans to come out of Congress: the Wyden-Gregg tax reform plan and Paul Ryan Roadmap. These are very different plans. The first focuses on simplifying the tax code without dramatically affecting revenues, while the latter introduces more than a trillion dollars of new taxes while slashing taxes on the richest Americans and corporations by even more. But they have one thing in common: they could both discourage charitable donations.
Let's back up a second. Tax experts on both sides of the aisle want to reform the tax system by simplifying our complex array of deductions and exemptions. It's not politically popular to remove deductions and exemptions, because they save money. Take them out, and some politicians will accuse you of raising taxes. So instead, you raise the standard deduction to encourage tax payers to stop itemizing entirely. The good news is that dramatically increasing standard deductions gives you the political space to clear out a lot of detritus in the tax system. The bad news is that if tens of millions of Americans stop itemizing, charitable donations effectively lose their tax-preferred treatment.
The Wyden-Gregg plan would triple the standard deduction to $15,000 for individuals and $30,000 for joint filers. What effect would that have on donations? It could reduce the incentive for middle class families to give, but "the big givers wouldn't be affected," said Roberton Williams at the Tax Policy Center. That means the charities who feel the largest impact will be those who rely on middle class donations, especially religious organizations. The Ryan plan is a different story, because it kills the charitable donation entirely. Today rich folks in the top tax bracket only pay 65 cents for every dollar they donate because of the tax deduction at 35%. If you take away that deduction, it raises the cost of giving by 50 percent. On the one hand, the rich would get richer under Ryan's plan, which might encourage them to give more. On the other hand, Williams said evidence suggests that raising the after-tax price of giving hurts donations. It's possible that Ryan's plan could hurt charitable giving at all levels.
To be sure, these are quixotic tax plans. And given the outcry over the Obama administration's plan to cap charitable deductions last year, you can bet that the charity deduction will have loud supporters. But these plans highlight an important debate with real implications within the tax policy community. We can agree that some deductions and exemptions and other tax expenditures distort the market. We can also probably agree that raising the standard deduction is the best political cover for clearing out a lot of special interest underbrush in the tax code. But the same way that a good, strong medicine can take out a virus but also cause nausea, the Standard Deduction Solution to our byzantine tax system could both solve and create problems for both public sector politicians and private sector interests.