Charitable Contribution Deduction–Camp Hearings Feb 14
by Linda Beale
Charitable Contribution Deduction–Camp Hearings Feb 14
Rep. Camp’s Ways & Means Committee held hearings today on the charitable contribution deduction. To watch the hearings, you can go to this website. Camp is planning a tax code rewrite, which he says is intended to lower rates, simplify the code, and curb some tax breaks.
Regarding those Camp objectives–they are not generally the right ones.
- Lowering rates is the wrong objective. We already have very very low tax rates, especially when you consider that we do not have a VATalongside the income tax as most European countries do. The primary motivation for lowering rates appears to be to cut revenues even more, in another ratcheting up cycle of the GOP “starve the beast” game. Lowering rates allows wealthy taxpayers and corporations to retain more of their profits, when they already garner a higher share of that income than average Americans who toil in their businesses as regular employees. Lowering rates also results in less revenues and increased borrowing, resulting in higher deficits and higher debt, contributing to the right-wing demand for cutting safety net programs like unemployment insurance, Medicaid, Medicare and Social Security.
- Simplifying the Code is the wrong objective. About 70% of US individual taxpayers do not itemize, meaning that their tax returns are quite simple. For the 30% of taxpayers who do itemize, the complexity is necessary to prevent scams, manipulation and unreasonable subsidization of those who don’t need it. A tax system intended to cover the many complex transactions of today’s globalized economies cannot be simple without being naive.
- Curbing some tax breaks is a good idea. But it should be more than “some” and it should be vigorously done to shift the tax burden towards the upper class and business and away from those in the lower and lower-middle income distributions. The tax breaks that should be curbed are the ones that are most regressive in nature–i.e., the ones that provide the majority benefit to the very rich.
The hearing today included lots of representatives of charities who were arguing their interest–keeping the tax-incentivized flow of money coming. The typical argument from charities is that the tax deduction is necessary to incentivize the transfer of money to charities. If it weren’t there, the argument goes, rich people might not give at all, or at least not nearly so much money.
There’s not a whole lot of empirical evidence to back this up. On the one hand, there are studies showing that non-rich people give much more of their limited assets away, proportionately, than the richest people (though of course it amounts to much less in absolute dollars), and many of them don’t get any break at all because they don’t itemize. Furthermore, rich people like the names-on-gold-plates-on-opera-house-chairs a heck of a lot, too. Maybe they give most of the money they give because of the status, the recognition, the remembrance-in-perpetuity, and to get to attend the events they’ve sponsored, which are usually the kinds of cultural events that they enjoy (opera, ballet, elite art museums, etc.). Does what a rich person says about why he gives hold a lot of weight in this debate? I’d argue it should not, since those who give typically want to be thought of as important philanthropists and not as status-greedy opportunists who are just giving the minimum amount to get their name and face plastered all over the New York Times…..
Does the tax incentive come into play in determining how much a person will give? Indubitably. But it isn’t clear that people who want to give $20 million to their alma matter wouldn’t do so even without the charitable contribution deduction! All that put together suggests that the deduction is highly inefficient. Most rich people would give money anyway to the things that bring them prestige and status and recognition and that accomplish what they want to accomplish now that they are rich and can afford to spread money around.
In addition to the inefficiency of the charitable contribution deduction–at least in amounts above some reasonable amount to allow to those who are NOT in the top quintile (say, 10% of adjusted gross income), there is also the problem that the deduction is primarily beneficial to the very wealthy. They pay tax at the highest rates (well, except when the system doesn’t work well because they have mostly preferentially taxed capital gains) and they get the most bang from the buck for the dollars they contribute. They invariably itemize, whereas most lower-bracket taxpayers do not. They give in ways that gives them prestige (there is really a quid pro quo for much of their giving, though it may not be financial).
Another complaint from charities and wealthy donors is that the absence of a charitable contribution deduction will result in the government just taking all that money that would have otherwise gone to the charity, because of higher taxes. The implication is that such a result is disastrous, putting the recipients of the charity’s charitableness at risk. But the truth is otherwise. The government may be more likely to support the poor and downtrodden than the wealthy are through charitable donations. How many wealthy are making contributions to Museums and Opera Houses and Elite Universities, versus a local homeless shelter or similar programs for the needy? And the decision of what to support, when made by a democratically chosen government, should more accurately reflect the will of the people than the decision of the one (wealthy) donor who gets the tax benefit of a deduction (though of course in these days of partisan gridlock and GOP obstructionism, that is regretably less true). Shouldn’t democracies favor taxation and redistribution via program selection over subsidizing the wealthy’s favored charities?
So some new, reasonable limits on the charitable contribution deduction make a lot of sense from the perspective of democratic egalitarianism. My suggestion would be to limit the deduction to 10% of the adjusted gross income reported on the tax return. (Ideally, such a modification to the deduction would be accompanied by a rethinking of the estate tax, to limit the amount that can be passed on to heirs without tax to an amount that more or less approximates the average estate of a taxpayer in the fourth quintile of the distribution.)
What about other changes that would be easier to pass and make lots of sense?
- Prime amongst them would be the elimination of the fair-market-value deduction (rather than basis) for contributions of certain properties. This is a sheer giveaway to the wealthy that cannot be justified. It allows zero basis stock where there is no remaining unrecovered capital investment to be contributed and yield a deduction for the full value, whereas if the person sold the stock, they would at least have to pay capital gains tax on the value. This provision should simply be deleted from the Code. That’s one simplification that would actually result in more fairness.
- Another area to tighten is the rules governing private foundations, to prevent the kinds of abuses (where 20 family members receive exorbitant salaries) that give charities a bad name.
- And Congress should eliminate the tax giveaway to large corporations (enacted in the Tax Reform Act of 1976) that permits them an enhanced deduction for donations of excess inventory–a deduction in excess of their cost basis and for more than the value of the inventory. It’s not clear that the deduction incentivizes any additional donations–if a corporation has excess inventory, it will either give it away (which can serve a significant PR function) or sell it at fire-sale prices (which can serve a negative PR function). IN most cases, it would likely give it away without the enhanced deduction. Of course, instead of urging Congress to eliminate the large busienss excess inventory special treatment, small businesses (mainly, S corporations with wealthy shareholders) are whining about how tough a time they have and arguing that they should be given a “level playing field” by letting them get the enhanced deduction too. See NAEIR President Gary Smith’s comments, below (in email).
Congressman Schock and Mr. Smith agree that the bill [H.R. 2592, introduced in the 112th Congres by Schock] would greatly benefit the small business community by establishing parity for S corporations and other small businesses and as such a level playing field with larger regular corporations. In addition to the principle of fairness inherent in this legislation in the tax benefits it extends to the small business community on par with larger corporations, Mr. Smith notes that “The impact of this legislation must be understood on the grassroots level: promoting greater collaboration between businesses and charities at the local level.” In brief, several million struggling small businesses and millions of individuals served by our nation’s charities would benefit through previously unavailable access to a wide variety of free donated products. (NAEIR email release Feb 14, 2013)
Not surprisingly, NAEIR is busy promoting the “enhanced” tax deduction (for up to two times the value of the excess inventory) to businesse–see here.
cross posted with ataxingmatter
Simplifying the Code is the wrong objective.
Lawyers, of course, have a vested interest in tax code complexity, it is very good for revenue generation, although miserable for taxpayers.
I have itemized deductions for the past 30 years, and my wife is self employed. It takes approximately 2 hours to complete our income taxes using one of the popular income tax programs. It’s just not that difficult if you keep reasonably good records throughout the year. How much simpler can that be?
Use of the tax program does save some time by assuming nothing much has changed form from year to year (e.g. that I’m still working for the same employer as the past year, that I may have given to a lot of the same charities and have the same bank accounts and mortgage, that I’m still married and we haven’t changed Social Security numbers or address).
Simplification just always seems like a code word for “tax cuts for the rich”!
Most people have one or two causes that they care deeply about, and one of mine is animal rescue. It’s not happenstance that virtually every time I go onto the web, an ASPCA ad or two appears on the page–including on AB. I mention this because animal rescue is not something that is funded at all by federal tax money, so additional tax revenues wouldn’t make up for lost charitable donations. Not directly, anyway.
But I doubt that most people who donate to animal-rescue nonprofits do it with even a moment’s thought to the tax deduction. I suspect that most people who donate are not wealthy, and a good percentage of them don’t itemize their tax returns. But among those who are wealthy, does the tax deduction make a difference in how much they donate? In most cases, I doubt it.
About two years ago, an obviously wealthy Detroit resident donated $1 million to fund a huge new no-kill animal shelter in Detroit–a city that has thousands of strays at any given time. Undoubtedly, he was happy to receive the tax deduction; the gift was announced during the last week of December. But surely he didn’t give the gift in order to get the deduction; he’s active in the most important part of what the shelter does: finding the stray dogs and bringing them to the shelter, as well as in the establishment of the shelter itself, such as buying and renovating a huge empty warehouse for it. If he could have afforded to donate the full $1 million irrespective of the tax deduction, he would have, if the deduction had not been available. I don’t know whether he could or not.
But then there is another side of the lost revenue, regarding, at least, animal rescue. Last fall, I got a call on my cellphone from a number that I didn’t recognize. When I answered, a young woman on the other end said something like, “I’m so-and-so, at such-and-such. Your dog is ready, but I’m calling about your Visa card, and …” I cut her off, and said, “You’re who, from where, and you’re calling about what??” She took a moment to respond, and then said, “Oh, I’m sorry. I must have the wrong number.” About 20 minutes later, she called back. Apologetically, she read the phone number and asked whether I had dropped off a dog that morning to be groomed. I said I hadn’t. In a sad tone of voice, she apologized for the call.
Obviously, someone who could no longer afford to care for his or her dog, but who was unwilling to take the dog to shelter, much less to simply dump the dog somewhere outside, had decided to take the dog to a groomer and provide false contact information and a no-longer-good Visa card, in the hope that the groomer would find a good home for the dog. I don’t know whether the person was someone who knew me and had my phone number, or instead just picked my number randomly.
But a decent social safety net, rather than one that is fraying–especially one that is reduced rather than increased during a recession or very slow employment and wage growth–does have an effect, if an indirect one, on animal rescue efforts. Both in the number of animals that need to be rescued and in the number people who can afford to rescue one.
Kudos to Linda for this terrific post.
PS: There’s a picture of a sweet little black, brown and white puppy, above a caption that reads, “Will you be my Valentine?”, on my screen, to the left of Linda’s post.