“The charitable deduction doesn’t benefit the individual.” Right.

Picture: T. Boone Pickens *not* benefiting from his $165 million dollar donation to OSU. That’s the head coach of the football team, Mike Gundy, he is casually chatting up.

The prospects for a grand bargain that includes tax and entitlement reform dim by the day as we get closer to the fiscal cliff, a set of spending cuts and tax increases automatically scheduled to take place on January 1st absent new legislation. Lawmakers on both sides of the aisle are scrambling to reach a deal that would prevent the Bush tax cuts for the middle class from expiring, though the Republicans aren’t giving up the tax cuts for the rich without a fight. This tight deadline means significant action on the long-term debt problem will most likely have to wait till next year. In the meantime, before the debate over which tax deductions are worthwhile resumes again, I want to make a small point on the semantics of charitable giving.

First, some background: In a tax reformer’s fantasy, all deductions would be eliminated (also known as base broadening) and tax rates would be lowered. This change could be revenue-neutral or it could aim to increase revenues to pay down the federal debt. Tax reformers hate deductions because they distort incentives and cause people to consume too much of certain goods, like health care and housing. The main impediment to this fantasy becoming a reality is the fact that many of the current tax deductions are very popular. People like being able to deduct their mortgage interest, charitable contributions, and state and local taxes from their federal tax bill.

The charitable tax deduction in particular has been hotly debated as a source of potential revenue. Charities have argued that we cannot get rid of the charitable tax deduction because giving will go down without the tax break. Proponents of the deduction say we cannot cap total deductions either, at say $50,000, because that would eliminate the incentive for giving when a person reaches that threshold. Instead, they argue, we should put a floor on the deduction, possibly around 2% of income. A floor would preserve incentives to give while raising significant amounts of revenue. Conservatives in particular like the charitable tax deduction because they view it as a free market poverty program. Instead of financing big government programs to ameliorate poverty, like Medicaid and Social Security, conservatives believe taxpayers should use their money to support charities of their own choosing.

All of this makes logical sense to me and I hope policymakers listen to the tax wonks when the make their reforms. The problem I have is one of semantics. Diana Aviv, the head of a trade group for nonprofits, crystallizes the conventional wisdom with this line, courtesy of a wonderful piece by Mina Kimes on the charitable deduction:

“‘The charitable deduction is not the same as other deductions,’ she says. ‘It doesn’t benefit the individual.'”

No. No. A thousand times, no. Charitable giving, and therefore the deduction, most certainly benefits the individual. Let’s consider two cases of charitable giving: large and small. Large charitable contributions provide the most manifest example of how charitable giving benefits individuals. Billionaires who have the means to write checks with eight digits or more are often invited to sit on the boards of the organizations they give to. That means they just bought power and influence in a respectable organization. Additionally, large enough donations are bound to attract media attention. See John Paulson’s $100 million gift to Central Park or T. Boone Pickens $165 million donation to Oklahoma State athletics (yep, donations to college football teams are still tax deductible). So, Paulson endeared himself to millions of New Yorkers and Oklahoma State renamed their football stadium after their most generous benefactor. No personal benefit I can see there.

The second case, small charitable giving has a subtler benefit to the giver: good feelings. Charitable giving, even on the small scale, has all the characteristics of a textbook economic exchange. You give the charity money and in return you get to feel like a good person for awhile. A boost to your moral fiber may not be as tangible as a new car or new clothes, but the utility it gives you is just as real.

Heads of charity trade groups, like Diana Aviv, don’t like to point this stuff out, or put it so bluntly, but this is the actual context in which charitable giving takes place. Let me be clear, by no means am I opposed to having special tax breaks for charitable giving. I, like the conservatives, believe it is a more efficient way to help the poor and indigent than another government program would be. However, just because the charitable deduction is desirable, that does not mean we should propagate falsehoods like, “The charitable deduction… does not benefit the individual.” It clearly does. The mortgage interest deduction does, too. There is also a case to be made that homeownership has positive externalities, which means society benefits from having a tax code that incentivizes homeownership. So, instead of having a simplistic discussion where the charitable deduction is a sacred cow protected by selfless saints, let’s have a real debate about how we can create a tax code that is best for society.

 

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