The US government is going to give $51.8 billion to charity this year. Not directly: it doesn’t have an army of technocrats deciding which charities get $1,000 and which get $100 million. Instead, it just has the charitable tax deduction.
If you’re in the 39.6% tax bracket, itemize your taxes (as you probably do, if you’re in that bracket), and give $1,000 to charity, only $604 of that donation comes out of your post-tax income. The rest comes from the government. For many taxpayers in high-income areas like New York City, the government gives even more: by the time you take state and local taxes into account, the government can end up footing the bill for almost half of your charitable donations.
The result is that the people determining where the bulk of that $50 billion a year is going are a relatively small handful of rich coastal types in high-tax states, skewed hard towards people with mortgages. (If you claim the mortgage interest deduction, that makes it almost certain that you’ll claim the charitable deduction as well.) The higher your tax bracket, the more influence you have over where that tax expenditure gets directed.
As a piece of public policy, this is is, as Richard Thaler says, a preposterous nonstarter. But it’s also the law, which means that any attempt to drag it vaguely in the direction of sensible would be a very good idea.
Weirdly, such an attempt might end up coming from none other than the Trump administration. No one really knows what to expect from tax reform, but one common thread, seen in proposals from both House Republicans and the White House, is the idea of doubling the standard deduction, while getting rid of the tax deductibility of state and local taxes.
That would be a great way of scaling back the mortgage interest deduction without taking direct aim at it. After all, the whole point of the standard deduction is to make life easy for filers with non-complicated taxes: you just take the standard deduction and move on, without having to itemize every last charitable donation you made over the course of the year. The bigger the standard deduction, the more likely people are to take it – and the more people who take the standard deduction, the less money the government spends on the charitable deduction.
Naturally, charities are up in arms, terrified that their donations will go down. A variety of institutions joined have joined forces to create the Council on Taxes and Philanthropy, dedicated to lobbying against any increase in the standard deduction. The standard deduction, they say, “is utterly unfair” and resembles nothing so much as “communism,” since it gives the most profligate spender exactly the same deduction as the most devout tither. Romain Hassrick, a baptist priest, has even said that it is “the first long step down the road toward the destruction of religious freedom.” He adds, for good measure, that the measure risks “squeezing out the vital spark of personal freedom” in America.
Oh, wait, that was what the charities said in 1944, when the standard deduction was still in its early days of being rolled out. They were ignored then, and the amount of money that Americans gave to charity was utterly unaffected by the introduction of the standard deduction. In other words, it turns out that when you give $1,000 to charity, it’s very nice if the government picks up some of the bill, but even if it doesn’t, you’re still likely to give the same $1,000 to the same charity.
This time around, the talking points are maybe a bit less apocalyptic, but they’re still pointed: the WSJ cites an Indiana University study which found that “these backdoor limits on charitable deductions could reduce giving by $13 billion, or 4.6%, annually”. The Journal doesn’t mention that $13 billion is the very top end of a big range from $4.9 billion to $13.1 billion. It doesn’t mention the way in which charitable giving has increased enormously in the past 10-20 years, in large part thanks to billionaires who don’t take the deduction. And it doesn’t mention that with total charitable giving approaching $400 billion a year and growing fast, now is actually an incredibly good time to start taking the government foot off the gas pedal. The philanthropic sector is big and mature enough now that it can finally fend for itself.
Instead, the Journal spends a lot of time talking about a desperate attempt to increase, rather than decrease, the scope of the charitable tax deduction. Basically, the idea is to give the deduction to everybody, whether they take the standard deduction or not: anybody can take the standard deduction and then itemize charitable contributions over and above that amount, to increase their total deduction.
This would probably increase charitable giving, at the margin, while also costing the government many billions of dollars. But just take a look at the estimates in that Indiana University study: expanding the charitable deduction to all taxpayers, it says, would increase charitable contributions by between $5.0 billion and $10.2 billion, while simultaneously decreasing tax revenue by $9.2 billion. Or, using a different calculation method, charitable contributions would increase by $12.2 billion, while tax revenue would decrease by $13.1 billion.
In other words, this proposal is essentially a direct transfer of billions of dollars from the public fisc to various charities, most of whom are likely to be churches of some description. (The people who give money to charity but don’t already itemize are middle-Americans who don’t have big mortgages but who are more devout than average and who tend to give substantial amounts of money to their church.) This comes very close to violating the separation of church and state, and besides it stands to reason that the churches most in need of government support would be the ones with the lowest charitable donations, not the highest.
So next time you hear someone talk about a “universal deduction” for charitable donations, understand that what they’re talking about is pretty much the least efficient use of taxpayer funds imaginable. Tax revenues would go down by more than charities would benefit, and the government would (as now) have no actual control over where those monies went. Charities have a very good public reputation, and it’s easy for lawmakers to want to support them. But this is not the way to do that.