The Cactus Tax Proposal, Part 2: Eliminate Tax Deductions for Charity

This post is about taxes. But people find taxes to be a boring subject, so let me begin by noting a few points that at first may seem like they have nothing to do with taxes:

1. In recent weeks, there’s been no small amount of criticism toward Obama over his choice of Church, given that the minister has voiced some opinions which are offensive to many people. Similarly, McCain has sought support from and campaigned with a preacher who is well-known for having beliefs that are offensive to many people.

2. The John and Cindy McCain Foundation seems to be dedicated to a single purpose: improving the quality of McCain’s kids education and their career prospects. Similarly, folks on the right could tell you about the Clinton’s foundation.

Now Obama and McCain, and Clinton and anyone else for that matter, are welcome to associate with whoever they want. But what I find interesting is that the government is in the business of encouraging some forms of offensive behavior, or at least, offensive behavior by some people. For example, the government specifically encourages the two preachers referenced in item 1 above. How? Well, as any good conservative will tell you, if cut the marginal tax rate on an activity, you get more of it, and if you raise the marginal tax rate on an activity, you get less of it. Donations to the organizations run by either of the two preachers are tax deductible, and thus, we are being given an incentive to make those donations rather than spend the money in other ways. This is especially true if the donation also effectively entitles you to benefits that under other circumstances would have to be paid for in non-deductible ways.

Additionally, as the second case shows, many acts of charity are not truly acts of charity. If I donate money to an organization, and in exchange, they slap my name on the side of a building, and have a dinner in my honor, is it really charity? Or is such behavior merely seeking adulation, and an opportunity to attend yet another event on the social season schedule?

FWIW, here’s what I do in my spare time: I feed feral cats. That means time and expenses (food, vet bills). I’ve never so much as written any of that off. I know other people with the same hobby, and they too aren’t writing any of it off. Ditto many folks who feed homeless people.

So here’s what I can conclude about charitable donations… Much of what constitutes charity, according to the tax code, is little more than self-serving activity, whether tax avoidance schemes or methods of self-aggrandizement. Much of it constitutes encouraging behavior that is offensive to some, or even many other people. Such activities will take place whether they are encouraged or not – why should they receive the government’s imprimatur, especially since much (most?) actually charitable behavior isn’t getting that benefit?

Eliminating charitable write-offs would eliminate these problems. But they’d also do something else. As I noted in the first post in this series, for a tax scheme to work any better than the current mess, people need to believe its fair and applies to everyone. Getting rid of loopholes of any sort is one step along the way, and charity is probably one of the most “useful” loopholes for any good accountant.

And once these loopholes and write-offs are eliminated, the tax rates we all pay can lowered, benefiting just about everyone, including those who don’t have the means to game the system and those who don’t support causes other people might find offensive.

Update… Added slightly to the conclusion, then modified it marginally.