Since early 2009 the Obama administration has been proposing tinkering with the charitable giving deduction as a way to increase taxes on high income folks and increase government revenues, primarily for health care spending. Here is one of the earliest of a torrent of objections, all protesting any reductions in incentives for giving. Just Google “charitable deduction news” for other similar pleas from beneficiaries of the rule. I too am staunchly opposed to any such tinkering with our outrageously complex and unfair income tax code, but I would love to see this and all other deductions, exemptions, exclusions, and credits die as part of a comprehensive reform that would significantly reduce marginal rates, thereby providing economic stimulation, while increasing current tax revenues and giving our budget crisis some immediate relief.
I have always taken advantage of the income tax deduction for charitable contributions and just figured that the government was willingly helping fund my favorite charities, mostly the church I happened to be a member of at any given time. That was when our national budget was pretty close to balanced and our debt was not too burdensome. With the financial crisis we are facing now, I have realized that it is not the government that is helping fund my charities. It is you, my fellow citizens, and I suspect quite a few of you are doing it unwillingly. I know I am not too happy helping fund some of yours.
Entities which qualify for tax-deductible contributions are known as 501(c)(3) organizations, named after the section of the Internal Revenue Code in which regulations for them are found. These organizations must have one of several qualified purposes, and the lists of those purposes and of the qualifying organizations have grown over the years and, without fundamental reform, will continue to do so under continuous pressure of lobbyists and special interests. Below is the current list available at the IRS web site.
The exempt purposes set forth in section 501(c)(3) are
testing for public safety,
fostering national or international amateur sports competition,
preventing cruelty to children or animals.
relief of the poor, the distressed, or the underprivileged;
advancement of religion;
advancement of education or science;
erecting or maintaining public buildings, monuments, or works;
lessening the burdens of government;
lessening neighborhood tensions;
eliminating prejudice and discrimination;
defending human and civil rights secured by law; and
combating community deterioration and juvenile delinquency.
You can probably tell right away why this list concerns me. The strangest idea is government funding of organizations with the purpose of “lessening the burdens of government.” Too many of these purposes sound like titles created to fit something somebody wanted to fund or raise money for. Did Consumer Reports have anything to do with lobbying for the special tax treatment of “testing for public safety?” And I wonder how the efficiency or effectiveness of an organization with the objective of “combating community deterioration” or “advancement of religion” or “lessening neighborhood tensions” will be measured. And while I have a great deal of interesting in promoting the Gospel of Jesus Christ, which involves a lot of giving, not to the government, but to our neighbors, I have no interest at all in the “advancement of religion” which, as the late Christopher Hitchins so eloquently argued, can be quite counterproductive. “Advancement of religion” even seems to me to be a goal inconsistent with our constitution. I’m especially concerned now that global warming seems to have taken on some of the characteristics of a religion.
There are some non-profits which participate in politics or lobbying and therefore cannot accept tax deductible contributions. I’m thinking that a lot of “religious” and "educational" organizations should fall in that category because, while they may not endorse specific candidates, many take positions on political issues that pretty much rule out all the candidates but one. It happens on both the left and the right so this is a non-partisan complaint.
Only taxpayers who itemize deductions and whose contributions plus other deductions fall within certain guidelines established by the IRS benefit from the charitable contribution deduction. In 2009, the most recent year for which such data are available, there were only 34M returns with deductible cash contributions, and they claimed total contributions of $130B. That is 24 % of the returns filed and a little over 10% of total deductions claimed.
The Obama administration proposals leave me with the feeling that the president believes that the purpose of this and other tax deductions is to help tax payers and that these higher-income folks don’t need any help and should therefore have less deduction. It seems to me that the theoretical underpinning of the charitable contribution deduction is not to help taxpayers but to incentivize them to give more. Of course the higher the marginal tax rates the more encouragement such a deduction gives. So the idea of eliminating this and other deductions in conjunction with significant lowering of marginal rates which makes the deductions less valuable seems to me to be a workable strategy for helping solve our debt and unemployment crises. And then we can all take full credit for our giving without depending on our fellow taxpayers to help fund our favorite charities.
And I promise that if such a plan is put in place and begins a steady long-term decrease in our debt as a percent of gdp, I will give away just as much without the charitable tax deduction as I have been giving away with it. If we can get the economy going so I can get a little more income, I’ll give even more. I hope you will all join me in that, regardless of how convoluted our tax code becomes as the tinkering continues.