A Function of Reduction of Deductions

One of my college mentors, Rob Reich (no, not that Rob Reich), is a political theorist who spends a lot of time thinking about public service and often ends up challenging conventional wisdom on the subject. While I’ll admit that his class “Ethics and Politics of Public Service” briefly made me consider a career in investment banking, I consider myself better for having taken it.

One of Reich’s more controversial stances has been an opposition to tax deductions for charitable donations. His argument is that it leads to loss of revenue for the government and that those in need are often worse off because of it.

What's the worst that could happen?

Assume you’re rich. You end up paying about 35% of your income in federal taxes.  Now, if you donate $100 to charity, you can deduct $35 from your tax payments. Not a 1:1 trade, but hey, isn’t feeling good about yourself worth the extra $65? Win-win right? Well, not exactly. The problem is, when you factor in the almost $190 billion Americans donate to charity every year, that adds up to quite a bit of lost income for Uncle Sam (Admittedly, most donors are not paying 35% income taxes nor are they claiming tax deductions).

Some, namely people with Rand in their name (like Ayn and Senator Paul), will argue this is good. Lots of people think the government wastes money and that charitable donations and tax deductions provide a mechanism by which to redistribute social aid. It’s not just libertarians who think this. Given that over 1/3 of tax revenues go to the defense budget, you might be forgiven for wanting to donate to a global health charity rather than the Pentagon. Nonetheless, in the end it means a lot less money for the Department of Education, USAID, and a host of other federal programs.

Brother, can you spare a dime?

Additionally, who’s getting all this money? We might agree that donating to UNICEF is good, but what about the other charities receiving money?  You can deduct donations to the NRA Foundation, ensuring decreased funding for law enforcement AND the increased availability of handguns.

Further, 60% of charitable donations go to religious organizations (not counting money to religious schools or faith-based service organizations). So, while we generally bristle at the thought of our government funding religious institutions, we allow it through backdoor subsidization.

Lastly, some donations aren’t even that charitable. You can only deduct charitable donations if you itemize your deductions- something done by wealthier taxpayers. It’s nice when rich alumni build new cancer biology labs, but does Stanford really need help building new student dormitories? What about opera houses that sell tickets for hundreds of dollars? Reich ends up wondering if the federal government is underwriting the leisure and status-building of the wealthy.

Reich isn’t asking people to stop donating to charity (though, I’d bet he has some strict criteria for who to donate to). He’s merely asking the government to close a loophole that deprives it of revenue and shunts funding to dubious charities. It’s worth considering how much charitable giving would decrease if tax deductions were eliminated; but it’s also worth considering where that money is and isn’t going.

If you want to read more of Reich’s work on the subject, check out “A Failure of Philanthropy” in the Stanford Social Innovation Review.

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About schwartz1983

Medical student. Aspiring public health practitioner.
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One Response to A Function of Reduction of Deductions

  1. Pingback: Feel Better About Your Deductions | MethodLogical

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