For the federal government the price tag on the charitable deduction was approximately $36.3 billion in 2010. And, as shown in the chart below, 58 percent of that accrued to the benefit of taxpayers with over $200,000 of income. But there is a halo around this tax break. After all, it subsidizes medical research and churches and education.
Let me be the Devil's Advocate.
- When the government allows a deduction for charitable contributions (a "tax expenditure") it is the economic equivalent of the government providing a matching grant to the recipient organization, equal to a fraction of the donor’s gift. It would be unconstitutional for the government to send checks to churches, but the deduction is the economic equivalent.
- There is good economic evidence that the amount of extra giving induced by the deduction is less than the revenue cost of the deduction. So, government could provide more dollar benefit by direct appropriations. (As proposed by CBO, efficiency could be improved by only allowing deductions over a threshold, e.g., 2 percent of AGI).
- The economic case for charitable deductions rests on the assumption that giving is socially beneficial. While no doubt that is often true, there is also a large amount of "warm glow" giving where a donor receives benefits as well.
- There is also no calibration of tax deductions to public benefits. Do we really need to provide an unlimited matching grant for opera houses and art museums when the nation is in a budget crisis?
Most importantly, because the proposal still has legs, in his FY 2013 Budget President Obama has proposed (p. 73) limiting the value of deductions and exclusions to 28 percent of their dollar amount. This would cut the benefit to taxpayers in brackets above 28 percent.
Having said all this, given the power of universities and other non-profits, there is not a chance in hell Congress will put any significant limits on the deduction. In fact, just the opposite is much more likely. If Congress agrees to tax rate increases proposed by the Obama administration, the value of the deduction will rise.