The Charity Defense

by Tom Bozzo

Much like the largely if not totally hypothetical family farm that might need to be sold off to cruel agribusiness to pay “death taxes,” I suspect that trotting out charities as the Real Victims of Obama administration plans to reduce tax expenditures on the wealthy is the latest Luntzian effort to put a plausibly human face on the upward-redistribution beast. The combination of income- and estate-tax policies makes the net direction of the incentives for tax-deductible giving ambiguous, and a kicker is an observation well-buried in an NYT article on the subject from last week:

Robert F. Sharpe Jr., a fund-raising expert in Memphis, said many of the wealthiest donors are already limited to deductions of 28 percent for their charitable gifts because they are subject to the alternative minimum tax.

A more correct modifier on “donors” in this case might be “wealthier” as the AMT hits in something of a reverse donut hole pattern, where the highest-income taxpayers tend fall out of the AMT system because they have sufficient tax liabilities at the top statutory rates for the ordinary income tax.

So the vast majority of taxpayers — Obama’s 95 percent — don’t make enough money to face more than a 28 percent Federal income tax rate on their last dollar of income. Of the remaining 5 percent, many pay the AMT and the tax price of their contributions is based on a tax rate no higher than the AMT’s 28 percent top rate. So we’re really talking about the very small slice of the very fortunate who pay the top regular income tax rates and are outside the AMT system: generally, the tip-top of the income distribution and their beneficiaries.

Of course the NYT has a role as a house organ of the upper class (at least the portion for whom the role is not taken by the W$J), but this is an example of what Jonathan Chait very nicely described as the systematic blowing out of proportion of the tax concerns of the very rich.

A little more is below the fold.

The dirty secret of tax-deductible contributions is that it amounts to spending lots of public money on projects that have some combination of dubious value to secular society and alternative means for public and private funding. A now-aged CBO study describes the disposition of tax-deductible contributions, and nobody should be surprised that the biggest beneficiary group is religious institutions. Religion is dependent on voluntary contributions, but are not so exposed to wealthy individual donors. Arts, education, health, and social services groups tend to have significant other sources of revenue — tuition, other fees for services, grants. (Arts groups are notably exposed to corporate donations, and many have been slammed as their benefactors have circled the wagons.)

Now there’s some evidence [PDF] out there that the tax-price elasticity of donations is greater (in absolute value) than 1 for some of the major categories of donations, which implies that the tax deduction elicits more donations than the tax cost. Otherwise, Establishment Clause issues aside, the government could rescind the tax deduction and make the charitable groups whole (at least as a group) through some system of grants.

Even this sort of Hicks-Pareto efficiency doesn’t establish that the funds are being put to their highest-valued use, though. A lot of donations make rich institutions richer, and diminishing marginal productivities and utilities would lead you to conclude that those institutions can run out of useful things to spend money on and thus are pushed into activities of dubious social utility like, uhm, making themselves into tax-free hedge funds with educational side projects. So I’m in favor of giving a pretty hard look at the tax status of endowments too.