The Perversities of the Charitable Deduction

(Marcos Brindicci/Reuters)

For whatever reason, the U.S. government likes to give out a lot of its subsidies in the form of special tax breaks. If you do something the government likes — buy a home, donate to charity, etc. — you get to knock off some tax liability when April comes around. This is mathematically and economically equivalent to a check in the mail, but many people, including a distressing number of limited-government conservatives, like to delude themselves that these are “tax cuts” rather than special handouts.

In addition to submerging government spending, tax deductions subsidize the rich more than the poor. If you earn enough to be in the 35 percent tax bracket, each $1 charitable donation (or what have you) costs just 65 cents, with the other 35 coming out of the government’s coffers. If your earnings put you in the 10 percent bracket, the same donation wins you just a 10-cent subsidy. And no matter how much you make, if you don’t have enough deductions to make it worth “itemizing” them — which is more likely to happen now that the recent tax reform boosted the standard deduction — you get bupkis.

Senator Mike Lee’s Social Capital Project has a nice report on the charitable deduction today that explains these dynamics — and adds that the deduction distorts the landscape of charity in America. Poorer people direct their giving disproportionately to churches and poverty relief; rich people throw more of their money away funding the arts and higher education. (I’d say I’m kidding but . . . I’m not, at least not entirely.)

The report has two solutions for this. One, put the deduction “above the line” so people can take it even if they use the standard deduction; two, replace the deduction with a credit that reimburses everyone’s charitable spending at, say, 25 percent. Both of these would cost the government revenue but increase charitable giving. I prefer the latter approach, but I’d pick a rate low enough to make the change revenue-neutral — and do the same thing for lots of other deductions too. 

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