The Dems' Lose-Lose Charity Tax Spike

Democrats are again looking at eliminating the charitable giving deduction. But this won't just hurt donors or the needy. It'll hit government too - in the pocketbook.

Once again, tax reformers are considering limiting or eliminating the charitable deduction. There are three problems with their approach.

The first problem is that the analysis of the impacts of reducing or eliminating the charitable deduction is always considered from a “tax benefit” standpoint instead of a “taxpayer cost” standpoint. When argued as a “tax benefit”, the charitable deduction seems unfair to lower-rate taxpayers. The question always asked is: Why should a taxpayer with a forty percent tax rate have a net after-tax cost of $60.00 from a $100.00 contribution when the taxpayer with a fifteen percent tax rate has a net after tax cost of $85.00 from the same $100.00 contribution? The answer is that there is no benefit, only cost, to either taxpayer. Each taxpayer is out $100.00. The reduction in taxes is only an intellectual incentive for the higher taxpayer to give because if he doesn't give, he will only have $60.00 in his pocket. Either way, the contributor of $100.00 to charity no longer has his/her $100.00.

Second, the reduction or elimination of the charitable deduction to the taxpayer will not ultimately raise any net revenues for the government.  If charitable deductions decline, the Federal government will undoubtedly fund the shortage for our biggest charities. It’s the government that will fund them with after tax dollars and it’s the government that will have a net loss. Let's look at the same example above and assume that "Bob", with a forty percent tax rate, does not make his $100.00 donation to hurricane relief. That contribution garners the Federal government $40 in additional taxes, but the charity is no longer there to help the hurricane victims. Now the government spends $100.00 for hurricane relief. By eliminating the charitable deduction, the government has a net loss of $60.00. Bob of course has the sixty dollars. How can this be a good idea?

Finally, in the long run, the reduction or elimination of the charitable deduction is an indirect attack on the church.  Churches are built with contributions. If the cost to the church donor of the contribution is both his $100.00 and his tax rate times the $100.00, large donors may simply be unable to make the large gifts needed to build places of worship. As the government cannot fill the void (they can’t after all fund the construction of churches) places of worship will suffer disproportionately.

At the end of the day, encouraging charity is a good deal for the needy and religious.  And it’s also a good deal for the government.

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