TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, August 20, 2013

Bartlett: The Future of the Charitable Deduction

New York Times:  The Future of the Charitable Deduction, by Bruce Bartlett:

The deduction for charitable contributions is among the oldest and most popular in the tax code. According to the Treasury, it reduces federal revenues by $54 billion, making it the fifth-largest tax expenditure. Whether or not it is curtailed to raise revenue for tax-rate reductions, there are growing concerns about the deduction and also about the mission and operations of

[T]he vast bulk of charitable gifts in dollar terms come from the wealthy, those making more than $200,000 a year. ... If the priorities of the wealthy were the same as those of the nonwealthy, this probably wouldn’t matter too much. But they are not. ... [A] blog post by Catherine Rampell in The New York Times shows [that] those with moderate incomes are far more likely to contribute to churches and other religious organizations, while the wealthy give relatively little of their total contributions to such groups. Education, health and arts organizations are much more significant recipients of contributions by the wealthy than by the nonwealthy. ...

Scholars are divided on the charitable deduction. Writing in The New York Times, Richard Thaler of the University of Chicago has said it needs to be rethought. He notes the unfairness of giving a large tax reward to the wealthy while giving nothing to those with modest incomes. Also writing in The Times, Robert J. Shiller of Yale says we shouldn’t undermine the generosity of Americans, who give far more to charity than the citizens of any other country. He suggests expanding the deduction by making it available to those who don’t have enough deductions to be able to itemize.

One obvious compromise would be to convert the charitable deduction to a tax credit: some percentage of contributions could be subtracted directly from one’s tax liability rather than from taxable income. This would equalize the tax reward across incomes and could be done in a way that raised net revenue to pay for rate reductions.

Whether or not the charitable deduction is part of tax reform, Congress should take the opportunity to examine the operations of charitable organizations. Some have been criticized for being excessively political, contrary to law. There are also concerns about abuse by some managers of nonprofits, who pay themselves excessively while spending little on actual charity. On June 13, the Senate Finance Committee published an options paper for reforming the charitable deduction and abuses by tax-exempt organizations.

(Hat Tip: Bill Turnier.)

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