A Poor Case for Charitable Deduction Reform

December 20, 2010 at 3:30 PM

University of Chicago economist Richard Thaler says in the New York Times that it’s time to rethink the charity deduction.

If there is one thing that most economists agree about in the realm of tax policy, it is that it’s best to broaden the base of any tax, all else being equal. That means minimizing the number of deductions and exclusions from taxable income in order to lower marginal rates and reduce distortions.

Thaler then says two deductions are likely to be targeted here, the mortgage interest deduction and charitable contribution deduction. Given the housing market, he says, the former is a nonstarter. So he proposed to reform – essentially to greatly reduce – the second.

I have some problems with his argument. His characterization of the current (troublesome, in his opinion) charitable deduction takes some shortcuts. For example, he argues that one must have “a substantial home mortgage” to qualify for the deduction. How so? Well, if you don’t have a substantial home mortgage, you won’t bother itemizing your deductions on your tax return in the first place – it won’t be worth your time, I guess. Of course, in fact, you don’t have to have any kind of mortgage to deduct your charitable donations.

He also throws out one of my least favorite liberal tropes; if the government deigns not to tax some portion of your income, they’ve granted you a subsidy.

Admittedly, the current tax treatment of charitable donations is not phrased as a subsidy, but that is just semantics. If someone in the 36 percent tax bracket gives $1,000 to charity and deducts it from his income tax, the donation costs him only $640. The government picks up the rest. That’s a subsidy.

No, it’s not a subsidy. The government did not pay anything because that money isn’t the government’s in the first place. This claim that it’s just semantics is disingenuous. People who use this argument just want to elide stating their belief your property isn’t yours to begin with.

He continues in this vein by saying it’s “hard to justify subsidizing the gifts of rich people more than those of poor people.” Yes, it would be hard. The thing is, the government is not subsidizing the gifts of rich people more than those of poor people. What it’s doing is taxing the income the rich keep at a higher rate than the income kept by the poor!

Look, it’s simple. The more you tax something, the less you get of it. Tax charitable donations, you’ll see charitable donations go down. Then again, to the political class, seeing funds taken from independent nonprofits and moved to the government coffers is a feature, not a bug.

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Entry filed under: Economic Issues.

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