Paul L. Caron

Monday, December 20, 2010

Thaler: It’s Time to Rethink the Charity Deduction

New York Times op-ed, It’s Time to Rethink the Charity Deduction, by Richard H. Thaler (University of Chicago, Booth School of Business):

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.

Any meaningful reform will face intense lobbying from those who stand to lose. The tax deduction for charitable giving is a case in point. Although changes will be fought both by the givers and the receivers of tax-deductible donations, there is good reason to disregard their pleas. ... I suggest three principles to help guide the debate:

  1. The tax subsidy rate should be the same for everyone. This means that rather than being a deduction from income, the subsidy should take the form of a tax credit, so that if you contribute $1,000 and the subsidy rate is 15%, your taxes would be reduced by $150. (Ideally this credit should be “refundable,” so it is payable even if your tax bill is zero or negative.)
  2. In the interest of tax simplification, the tax credit should apply only to donations above a certain minimum. The minimum could be, say, 2% of AGI. That way, only large contributors need to bother keeping records.
  3. The tax credit rate should be kept low enough to prevent large distortions. If political considerations require that we maintain this subsidy, it might make sense to peg it to the capital gains tax rate, which is now 15%.

 N. Gregory Mankiw (Harvard University, Department of Economics) disagrees:

I think there is a bit more logic to current policy than Thaler does. Suppose you believe, as I do, that consumption is a better tax base than is income. Then, starting with a measurement of income, it makes sense to allow deductions for "non-consumed income"--specifically, saving such as IRA and 401k contributions and charitable giving.

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And now I see that the estimable Daniel Halperin of Harvard has an article calling for the tax subsidy for endowments to be reduced in the Tax Analysts EO Tax Report for January 2011. Good for him.

Posted by: Arthur | Jan 4, 2011 1:23:06 PM

It seems that everyone who wants to make the tax code "simpler" ends up just making it more complex. I am sure in his mind that scheme is less complex than just allowing people to take a deduction on schedule A so long as they have an acknowledgement from the charity. Everyone has an ax to grind in this debate and that, above all else, will make real reform elusive. Most everyone wants something from the government and most everyone wants someone else to pay for it. That is the core of the forever debate about the tax code.

Posted by: George W | Dec 20, 2010 10:39:24 AM

Why, if base-broadening and fairness is the goal, are these proposals only talking of reducing the deduction for charitable contributions? Why not tax the income of large charities and endowments that seem to be growing into a larger and larger (untaxed) part of our economy? How about a proposal that all income of tax exempt organizations with assets over the estate tax threshold be taxed at trust rates? How about a proposal that a larger minimum of every tax exempt organization's assets be expended each year? How about a proposal that private foundations have a limited period of existence?

There are many wealthy, untaxed nonprofit organizations of dubious societal value, so when one talks of taxing the rich, I fail to see why they should be excluded.

Posted by: Arthur | Dec 20, 2010 7:47:11 AM