Better Ways to Fund Health Reform: Capping Charitable Deductions

By Conor Clarke

It seems to me that the best objection to the House's plan to pay for health care with a surtax on the wealthy is that it's not very likely to pass in the Senate. And so I'm drawn back to two ideas that might have a little more traction: capping charitable deductions, and capping the tax exclusion for employer-sponsored health care. The first idea is what the administration originally proposed (many moons ago, when Obama took office) to help fund health care.

The basic idea is to limit the amount you can deduct from your income taxes when you give to charity. I realize that reducing "charitable giving" sounds like a horrible and miserly thing to do. (And it will definitely curtail giving, if not by as much as critics say. Lowering the deduction for gifts necessarily reduces the incentive to give.) But as much as I like the idea of being horrible and miserly, I don't think the consequences will be dire, for two reasons:

First, the deduction is unfair: You can deduct gifts from your income tax liability at your top marginal rate. So, if you are in the highest tax bracket you can deduct $350 for a $1000 donation. If you are in the lowest tax bracket you can only deduct $150 on a $1000 donation. I think this is regressive.

Second, the deduction is poorly targeted. When people think charitable giving, they think of things like the Salvation Army and the Bill & Melinda Gates Foundation. But you can claim it for giving to almost any 501c(3) organization, which the relevant portion of the tax code defines (if you're still awake) as a "corporation, trust, or community chest, fund, or foundation [...] organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals." That's broad. Too broad. (My feeling is that the appropriate way to think about the charitable deduction is not as "a government subsidy for the common good," but rather "a government subsidy for a particular kind of private spending.")

Of course, I confess that it would be difficult to arrive at a broad consensus on what private donations count as socially beneficial. But, fortunately, there is already a mechanism for making consensus decisions about what is socially optimal: Democracy! If we'd rather use this money to fund health care reform, there's no reason to be ashamed.