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Tuesday, January 29, 2013

Epstein: President Obama's Proposed Charitable Deduction Limits Will Hurt the Poor

Defining Ideas op-ed:  The End of Charity?, by Richard A. Epstein (NYU):

The received progressive consensus mistakenly pushes hard on limiting charitable deductions and increasing the progressivity of the tax code. ...What is doubly ironic in this situation is that the champions of redistribution seek to neuter the single most effective device for redistribution that is available to modern societies—the charitable deduction. Charities do not specialize in wealth transfers from poor to rich. But, as Diana Aviv, the head of the Independent Sector, has pointed out in her testimony to Congress, private efforts to assist those in need are massive. In my view, they are far more efficient in getting aid to target groups than the United States government is.

It is tempting to think that the limitations on deductions will hurt the rich by cutting back on their deductions. But the burden will fall heavily on the recipients of charitable support, for as the price of making a charitable gift rises (anywhere from 30 to 100 percent), the level of charitable giving will decline. Hurt in the shuffle are, of course, the low-income beneficiaries of charity.

It is also important to note that voluntary charitable contributions are not subject to many of the serious worries that undermine regimes of high taxation. What the current tax deduction does, in effect, is to take income out of a rich person’s tax base if he or she is prepared to give it to others. It protects the incentive to create wealth, as people are far more likely to work hard to generate wealth whose distribution they can direct than to create wealth that the government snatches from them for its own purposes. The constant trade-off between the creation of wealth and the transfer of wealth is far less likely to occur with voluntary transactions than coerced ones.

Why then would the government take steps to cut back on charitable giving? The most obvious explanation is both insidious and dangerous. It is to shrink the size of its main competitors in the private sector in order to increase the dependence of ordinary people on the federal government. ...

The bottom line is that the charitable deduction should stay. It is the rest of the system that stands in desperate need of reform.

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