Thursday, June 14, 2012

A thought about charitable deductions.

I quote from The Economist:
“I’m expecting a big fight in Congress over charitable deductions and over the definition of charity. I’m very concerned,” says Diana Aviv, the head of Independent Sector, an American trade association for charities. President Barack Obama has made a number of attempts to limit the amount of giving that the rich can deduct from their taxable income. And Ms Aviv says state and local governments are going further than that in attacking charitable tax breaks.

The graph means that when someone in the top tax bracket in the United States makes a gift of $1 to a charity, he gets a tax reduction of $0.38. In other words, a 62 cent contribution by a rich man is matched by a 38 cent contribution from the government in what is called "tax financing". Since the taxes that are actually collected still have to pay for the functioning of the government, it is really the taxes the rest of us are paying that pay the piper.

I suppose that there are a couple of justifications for this system. The one we don't like to think of is that rich people have lots of influence on government and use that influence to get tax breaks, including tax exemptions that multiply their gifts to their favorite causes.

The better one is that 38 cents of foregone taxes encourages 62 cents of matching contributions from someone else, resulting in a dollar donation to something which benefits the public. That of course requires that organizations which can except tax deductible contributions do in fact benefit the public. An organization that spends most of the donated money to collect the donations may in fact not provide more or better public services than the government could provide itself with its share of the donation.

Moreover, how many people really want to finance the opera, the polo team, or the donation of still another expensive painting to a museum. It would seem that the rules which organizations are appropriate for tax deductible donations might well be revised to reflect public opinion on what is suitable for government tax financing.

Lets think about that painting for a bit. A rich person may have bought it from a ritzy gallery a couple of decades ago, and seen it the value of works by the artists increase radically over the interval. When the person donates the painting, its value is set as the current gallery value, not what was actually paid. Moreover, the painting may have lost interest to its owner years before and have been taking up space in a closet. The gallery may in its turn, store the painting in a vault not putting it on display for the public edification. Yet the government gives the full tax deduction.

I would suggest that in our country that is built on the basis of separation of church and state, government tax financing of places of worship may be inappropriate. This is especially true if officials of religions are bending the rules and using the authority stemming from their religious organizations to affect elections or to lobby for causes.

Of course, I don't suppose that the political process will succeed in making any major changes in our tax codes to make tax financing more supportive of the public good.

Indeed, I suppose the situation will get worse rather than better. I assume that we will be increasing the top tax rates on the rich, at least by letting the Bush tax rate reductions expire. That means that for every dollar donated by a rich person, that person will get a larger tax exemption -- or that there will be a larger implicit tax financing for that person's charity.

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