Paul L. Caron

Wednesday, February 1, 2012

Hurt: Presidential Candidates and Charitable Deduction Reform

Christine Hurt (Illinois), The Presidential Candidates' Tax Profiles: Corporate Tax Reform or Charitable Tax Deduction Reform?:

Romney and his wife are very generous with their charitable contributions (they gave 16.4% of gross income, more than other filers with similar income). Newt Gingrich, on the other hand, donated less money as a percentage of income than even the average taxpayer, even though his AGI was over $3 million.

One of the questions surrounding the charitable tax deduction is why should the government subsidize charitable giving. If we believe that the deduction prompts taxpayers to give 30% more or something like that than they would otherwise give, the government is generally giving a partial match to taxpayers's pet charities. ... Without the deduction, would taxpayers generally be less generous by 30% or so? Would we still donate to our religious institutions, alma maters, food banks, women's shelters and legal aid clinics without it?

I think the answer for the Romneys is yes. They probably donate to their church out of a mixture of duty and love for their church, and a deduction wouldn't change that.  According to Miranda [Fleischer], the Romneys also aren't giving charitable donations in the most tax-advantaged way, so lowering their tax bill does not seem to be a goal of their generosity. ... [W]hat about the middle class (or the other 99%, depending on your choice of rhetoric). Do we give or give more generously because of the tax deduction?

I think business law can provide insight here. Look at Kiva. If you make a "loan" to an entrepreneur through Kiva (which it makes through its foreign partners), you do not receive interest, but even that foregone interest is not tax-deductible. Neither is the principal amount, even if you do not cash out after being repaid but re-loan instead.  (See Sarah Lawsky's Money for Nothing: Charitable Deductions for Microfinance Lenders, 61 SMU L. Rev. 1525 (2008). But, Kiva was pretty successful in attracting what were essentially non-deductible charitable donations.

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RE Kiva: how can you deduct foregone interest when you don't even recognize it in the first place? Also, if you want to deduct your loan principal, then don't make it a loan; donate it to a 501c3 that will then lend it out.

Posted by: Matt | Feb 1, 2012 11:11:02 AM