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Saturday, December 18, 2010

Thaler: Time to Rethink the Charity Deduction

Richard Thaler says we should rethink the deduction for charitable giving:

It’s Time to Rethink the Charity Deduction, by Richard Thaler, Commentary, NY Times: Now that Congress has actually managed to enact tax legislation, it may be time to consider some bigger issues. I hope that broad-based tax reform will be high on the list of both major parties. ...
Two deductions are likely to be central in any debate on tax reform: those for mortgage interest and for donations to charity. ... I will concentrate on charitable giving. ...
It would be reasonable to ask why the government should subsidize charitable contributions at all. But for now, let’s discuss this simpler and more politically relevant question: If we are going to continue subsidizing these donations, what is the best way to do it?
First,... strictly speaking, your eligibility to deduct a charitable contribution doesn’t depend on whether you have a big mortgage. But it might as well. You can deduct charitable contributions only if you itemize..., and the most common way a household collects enough deductions to make itemizing worthwhile is to have a big mortgage. ...
But I challenge anyone to justify a system in which we essentially subsidize contributions made by people with big mortgages. For one thing, this set-up magnifies the already large distortion created by the mortgage interest subsidy...
It is equally hard to justify subsidizing the gifts of rich people more than those of poor people. ... In the overall debate, we should be consistent above all else. If we think that high marginal tax rates are bad because they distort incentives, the same is then true for tax subsidies. If people want to give money to a worthy organization, applaud them. But let them do it on their own dime. I don’t think it says anywhere in the Bible that tithing should be calculated on a before-tax basis.

The one thing I wonder is the extent to which substantially reducing or ending the subsidy would cause charitable giving to decline and, in turn, how much it would reduce help for those in need. The government relies upon the private sector to provide social services, and it encourages this behavior through a tax subsidy for charitable giving. Soup kitchens financed by donations are a good example of this. If those subsidies end and services decline, the federal government is unlikely to step in and provide the services itself given the current political climate.

    Posted by on Saturday, December 18, 2010 at 02:07 PM in Economics, Social Insurance | Permalink  Comments (68)


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