Arnold Kling  

Taxes vs. Philanthropy

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The New York Times' Louis Uchitelle writes,


When it comes to wealth, one in every 325 households had a net worth of $10 million or more in 2004, the latest year for which data is available, more than four times as many as in 1989.

As some have grown enormously rich, they are turning to philanthropy in a competition that is well beyond the means of their less wealthy peers...

Fighting AIDS and poverty in Africa are favorite causes, and so is financing education, particularly at one’s alma mater.

“It is astonishing how many gifts of $100 million have been made in the last year,” said Inge Reichenbach, vice president for development at Yale University, which like other schools tracks the net worth of its alumni and assiduously pursues the richest among them.


I think that the conflict between private philanthropy and government taxation is going to be one of the most explosive political issues of the next ten years. The people with the kind of net worth Uchitelle talks about probably have the option of contributing all of their income to charity without having to sacrifice any consumption. The result would be that they would pay no taxes. My guess is that this sort of thing drives the Left nuts, while the Right sees it as a win-win, with civil society getting stronger and government getting weaker.

UPDATE: commenters have pointed out that there is a 50 % limit on charitable contributions--you can only claim deductions up to 50 percent of adjusted gross income. If you contribute more, you can carry over contributions to next year, but for this year you are limited. In any case, don't rely on this blog for tax advice.


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CATEGORIES: Income Distribution



COMMENTS (12 to date)
Alcibiades writes:

Come on Arnold, the Right needs its growing food too...

Mark Seecof writes:

So far as I'm concerned, donations to charity are a form of consumption, and should not go untaxed. The "donor" is really purchasing either "reputation" or self-satisfaction. Some people buy a similar form of reputation in Nordstroms, or self-satisfaction at a driving range. It's particularly outrageous that we subsidize people who like to listen to sermons (or antique music) but force moviegoers to pay full price for their entertainment choices.

The putative reason for the charitable-donation tax deduction is to encourage "donors" to buy their utils from organizations which will funnel a portion of the money into altruism. However, we have learnt empirically that very little donated money goes to altruism. Much of it goes to transaction costs, and nearly all of the rest goes to various kinds of entertainment, axe-grinding, or rent-seeking. Furthermore, thanks to the "standard deduction" and the new rule on documentation (see Jim Maule's comments at http://mauledagain.blogspot.com/2006_11_01_mauledagain_archive.html#116360135006344244) the charitable-deduction only subsidizes expenditures by a few high-income (above, say, $150K/year) folks.

It is bad public-policy to subsidize people's pet amusements or causes with tax breaks. It is especially bad policy to extend such subsidies only to a small minority of taxpayers.

ocmpoma writes:

Ick. Left vs. Right? One would hope that such overly simplistic thought wouldn't be found in a post on an economics blog.

KipEsquire writes:
The people with the kind of net worth Uchitelle talks about probably have the option of contributing all of their income to charity without having to sacrifice any consumption. The result would be that they would pay no taxes.
Not under the basic provisions of the IRC, which limit charitable deductions to 50% of AGI and impose "reduction in deduction" hyper-progressive phase-outs of itemized deductions for high-income filers.

Of course, the "super-duper rich" might be able to craft alternatives via trusts and such. On the other hand, the AMT could be easily amended to disallow charitable deductions.

Arnold Kling writes:

Kip,
Can you point me to the provisions you talk about? I thought that charitable contributions were specifically exempt from the alternative minimum tax.

Arnold Kling writes:

Marc Secoff wrote that charitable contributions should be treated as consumption, since people who make them gain in self-esteem or reputation.

However, I think that a lot of government spending is also carried out as an exercise in moral vanity. I would rather have people act out their need to feel good about themselves using their own money than by stealing it from others.

Omer K writes:

Ohhh...charity instead of taxes? The left will HATE that. The left, (somewhat more so than the right) is all about control.

After all, I could contribute my money to a non-profit firm intent on ending affirmative action, no?

Bill Kruse writes:

What would really drive the left nuts is massive contributions to K-12 education in the form of scholarships to attend private schools. Unlike state-funded education vouchers, there's no argument about separation of church and state. A Buffett-size contribution in this area focused on cities with the most decrepit public schools would have a tremendous beneficial effect in a relatively short timeframe. That's where my money is going.

A few years ago, Ted Forstmann of Forstmann, Little had mounted a big drive in this area. I'm not sure how this is going. Does anyone know?

Horatio writes:

Mark,

You make the mistake of equating tax breaks with subsidies. This presumes that all income rightfully belongs to the state.

I am not subsidizing your beer drinking, porn rentals, or purchases of Das Kapital by choosing not to steal your money, neither is the government.

gbridgman writes:

[quote]Can you point me to the provisions you talk about? I thought that charitable contributions were specifically exempt from the alternative minimum tax.[quote]

Charitable contributions, unlike say state taxes, are deductible both from regular taxable income and the AMT taxable income, but are as 'kip' mentioned subject to percent of AGI limits.

references (for example) http://www.aei.org/publications/pubID.25110/pub_detail.asp

Mark Seecof writes:

Actually, Dr. Kling, my assertion is stronger than your paraphrase, though perhaps I expressed it poorly.

I contend that most charitable donations represent simple purchases of either reputation, or economic goods which are equivalent to various taxable goods. These include entertainment (e.g., all donations for the upkeep and staffing of churches; for the maintenance of symphonies or opera houses; etc.), pecuniary advantage (e.g., donations to "environmental" charitable trusts which buy land adjacent to rich peoples' estates in order to keep it off the market, so adjacent landowners may enjoy greater exclusivity, viewshed, berry-picking, etc. thus increasing the value of their properties), or lobbying/ rent-seeking (e.g., all "charitable" trusts which lobby for more government spending or regulation--Sierra Club, Joyce Foundation, etc.).

(I didn't mention it before, but you do realize that many large "charities" are rackets that exist mainly to pay bloated salaries to their managers and fundraising sub-contractors, don't you? Why should we subsidize rackets?)

Now, I agree with you that it would be better for people to spend money on their own priorities than for government to extort money from people to spend on politicians' priorities. So I favor reducing taxes and government spending.

But given any particular level of taxation and spending, I would rather NOT subsidize some taxpayers' so-called "charitable" spending using tax money extorted from other taxpayers unable to label their consumption as "charitable donations."

The only difference between a "charitable" opera house and a "non-charitable" jazz venue is rent-seeking prowess. The only difference between the "religious" donations of a standard-deduction- taker and a Schedule-A- filer is rent-seeking prowess. Let's eliminate the charitable deduction. Then each taxpayer will purchase whatever reputation or other goods he wishes without subsidy from other taxpayers. At the same time, reducing rewards from rent-seeking will reduce associated deadweight losses.

Horatio--thank you for bringing up the distinction (to which I have often alluded myself) between tax breaks and government spending. I don't actually think all income belongs to the state, and do not think that broad tax exemptions should be considered government spending. However, I do think we must recognize, then try to abolish, narrowly-focused tax favors, which are merely the fruits of successful rent seeking. When a rent-seeker persuades the legislature to open a loophole for his activities while leaving other folks' equivalent activities subject to tax, that is inequitable, whether you characterize it as "government spending" or not.

Horatio writes:

Mark,

If a loophole exists for A but not B, the system is not made more equitable by stealing more from A. The injustice stems from B's lack of an exemption, not from the existence of an exemption for A. It goes back to the lesson our parents taught us. Two wrongs don't make a right.

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