Tax Analysts Blog

Is the Charitable Deduction a Sacred Cow?

Posted on Dec 10, 2012

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?

Many tax reform plans have proposed limits on the charitable deduction. The Reagan administration's first pass at tax reform ("Treasury I", p. 81) included a proposal to only allow charitable deductions in excess of 2 percent of adjusted gross income. In 2005 President George W. Bush's tax reform panel recommended (p.59) a one-percent floor. The Bowles-Simpson plan (p. 32) included a 2-percent floor and converted the deduction to a 12-percent tax credit. In 2010 the Rivlin-Domenici commission (p. 127) proposed replacing the deduction with a 15-percent credit. And during the campaign Mitt Romney proposed a cap on itemized deductions (although it was never clear whether the charitable deduction would be included under the cap).

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.

Read Comments (2)

Vivian DarkbloomDec 10, 2012

"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."

Actually, no. The FY 2013 budget proposes to re-introduce the Pease phase-out
provisions *and then* limit the remaining amount to 28 cents on the dollar.

In effect, the combination of these provisions ultimately restricts the
charitable deduction to 5.6 percent of the gross amount given by certain
high-income taxpayers. Obama's got cheek---he's now rejecting the Republican
proposal to raise $800 billion in revenue from the rich by limiting their
deductions and exclusions because to do so would hurt charitable giving.

Vivian DarkbloomDec 10, 2012

"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."

The proposal I mentioned in my earlier comment has been in Obama's budget
proposals for some time. He claimed credit during the election campaign for
revenue these proposed restrictions on the charitable contribution would
generate. We now know he was never serious. Where was Martin Sullivan, the
Tax Policy Center and other tax policy pundits when all this was happening? I
think they were too busy trying to convince the public that *Romney's* proposal
couldn't work.

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