The non-profit groups criticizing the administration's plan to cap charitable tax deductions seem to think so. Under the current law you can obtain an income-tax deduction for a charitable donation. Obama wants to limit that deduction to those at or below the 28% income tax rate. In other words, if you are in the 33 or 35% tax bracket, you will only be able to deduct 28% of a gift. Non-profits say this is a bad idea because it "will be a blow to organizations already struggling with a steep drop-off in donations."
Well, maybe. But I don't have much sympathy for complaints about the proposal, since the non-profits are lucky to have any subsidy at all. Itemized
deductions on charitable gifts are one of the strangest and most
regressive elements of the tax code. (Which makes it a bit sour to hear
the heads of charities and NGOs defend them.) Ah, let us count the ways:
1. They are in-your-face regressive. This is simple: The higher your tax bracket, the more the government will subsidize your private charitable spending. As Peter Orzsag says: If you are in the 15% tax bracket, you will save $1,500 on a $10,000 dollar gift. If you are in the 35% tax bracket, you will save $3,500. This is obviously regressive, and it comes despite the fact that downscale families actually give more of their income to charity than high earners.
2. The deductions lower tax revenue. This is also simple: Every dollar the government gives up in income-tax revenue is one more dollar it isn't spending on its own programs. How much? The charitable deduction law is essentially the largest government grant-matching program in the country: in 2002 there were $142 billion in deductions. The federal government is basically letting rich donors make their own decisions about how these tax dollars are spent. This makes sense only if you think the rich donors are smarter than democracy. (More on this in a second.)
3. Wait, wait, the deductions actually lower tax revenue twice. How? Because estates deducted for charity are not hit by the estate tax. (Of course, the outrageousness of this particular point depends on your opinions about the estate tax, which is a different kettle of tax policy. But bear with me.)
4. The definition of what qualifies for deduction has expanded over time, with little oversight or accountability. Or, as the New York Times once put it:
What qualifies for that tax deduction has broadened over the 90 years since its creation to include everything from university golf teams to puppet theaters -- even an organization established after Hurricane Katrina to help practitioners of sadomasochism obtain gear they had lost in the storm.
Should the US government be subsidizing sadomasochism?
5. Sure, maybe. But the current deduction seems to assume that rich people are smarter than the government, and will always make the most socially beneficial decisions. This isn't a caricature of anyone's position, really. The NYT article above quotes the philanthropist Eli Broad as saying: "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." Of course, if Broad's theory is true then there's no reason why it shouldn't be broadly (ha) applicable: if every dollar of private charitable spending increases social welfare more than any dollar of government spending, then Broad shouldn't pay taxes at all.
I will keep an open mind about the social value of whips and leather. In exchange, I hope Broad and others realize that at least government decisions are at some level made democratically (would the public vote to name an art museum after Eli Broad?) -- not to mention the fact that the government also has advantages of coordination and scale that thousands of individual donors lack. Let democracy do its own sadomasochism, please.
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