Monday, December 20, 2010

Ho-ho-ho! The Charity Deduction

In light of the recent extension of tax cuts for the middle class, the rich and the uber-rich full-throated cries for overhaul of the federal tax code have come up (again). Cynic that I am I don't see much emanating from the Cave of the Winds but more wind. But I digress.

In The New York Times on December 19th economist Richard Thaler argues that "it's time to rethink the charity deduction." The burden of his essay is that the donations of the rich are "valued" more than those of the poor because contributions are "subsidized" by the government through tax deductibility. He's right of course. A gift's value is worth more to someone in a 36% bracket than someone at 25% or 15% or zero. His suggestion is that the deduction be replaced by a tax credit to level the field.

We can expect that my industry's lobby will submit that if this happened The-World-As-We-Know-It would end(!) because a tax credit rather than a tax deduction would dis-incentivize and decrease giving at the top. I don't know, nor does anyone else, what the practical effect might be.

To me an equally intriguing problem (about which I have written frequently) is that the 501-c-3 is too broad and many organizations that qualify as "charities" are anything but. There should be a distinction between traditional charity - e.g. serving the poor, helping the sick, etc. and that donations to large and/or less needy charities (size to be determined) should be deductible on a sliding scale - i.e., a higher deduction (or credit) for gifts to the smallest and neediest. I know - how is this to be defined? I have no idea but someone invented the wheel because pushing and pulling was a big drag. This can be solved too.

you're still awake - who writes about economics at Christmas anyway? - think about it: as a contrarian I pretty much applaud in general the work of WikiLeaks. Quite a show! But is it a charity in the traditional meaning? No. But a gift should be "worth" something but not as much as a gift, say, to a food bank.

Prof. Thaler admits that his other bete noire - the mortgage deduction - should also be one of the first points of attack in re-doing the tax code. His conclusion is that no serious progress can be made on deficit reduction (assuming that is a real concern - economists as usual disagree)and cutting expenses. He also concedes this is a non-starter.

I happen to think messing with the charity deduction is just another dog that won't hunt.

And on that profound note Happy Holidays to all!