Tax Analysts Blog

Does the Charity Deduction Keep Government Small?

Posted on Aug 20, 2013

If you believe Max Baucus and Orrin Hatch, every tax preference is on the table these days. The Senate’s "blank slate" approach to tax reform treats all preferences equally, in the sense that all are equally vulnerable.

But in fact, some preferences are probably more equal than others. Take the deduction for charitable contributions. This preference has been on the books since 1917, and it remains one of the tax code’s most popular features (not that there’s much competition for that distinction). In a recent poll, 79 percent of respondents said it was "very" or "somewhat" important to protect the deduction from would-be reformers.

But what accounts for that popularity? The easy answer is money: the preference reduces the tax bite for millions of Americans in almost every income bracket. As my colleague Bruce Bartlett has described in the New York Times , the deduction is much more valuable for wealthy taxpayers than it is for everyone else, chiefly because its benefits rise in tandem with marginal tax rates. But the deduction seems to be popular up and down the income scale.

And that's because the deduction's popularity has never been solely about the bottom line. Champions have long insisted that the provision serves a vital public interest, subsidizing essential and undersupplied goods and services. The free market won't create enough soup kitchens, according to this argument, so we better make it easier for charities to fill the gap.

Experts disagree on how well the charity deduction does this subsidizing. But champions of the provision have often buttressed their case with a related -- if politically charged -- assertion. The deduction, they say, helps keep a lid on the size of government.

"Limiting the deduction for charitable contributions would give the Federal Government a monopoly on tax-free provision of services in human resources, education and other traditional charitable enterprises," wrote one opponent of reforming the deduction in 1984. "The Government does not always provide the best services in these areas, and there is little reason to assume that its performance would improve with reduced competition."

In earlier decades, deduction advocates offered more robust versions of this same point. In 1944, one unhappy spokesman for the Northern Baptist Tax Vigilance Committee called pending reform efforts "a fraud on church and charity." Indeed, he said, they were positively un-American. "It is the first long step down the road toward the destruction of religious freedom and toward federal subsidy and control of education and charity," declared attorney Romain Hassrick. "That is fascism."

Today’s arguments over reforming the charity deduction are less colorful than those of previous decades. But they continue to hinge on vital questions of national character and political institutions. Fans of reforming the deduction have their work cut out for them.

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