The Bowles-Simpson reform plan is receiving renewed attention from the left and right, but one aspect of it has received insufficient scrutiny: As part of an effort to “broaden the base” of taxation, Bowles-Simpson removes the tax deduction for charitable gifts and replaces it with a small tax credit.
Writing at CNBC, John Carney draws a parallel between volunteering and charitable giving to argue against such a revision:
Millions are Americans donate their time to charitable causes. Especially when disasters like Sandy strike, Americans turn out in droves to help the stricken. We’re a generous nation in this respect. The U.S. Bureau of Labor Statistics says that about 64.3 million people volunteered through or for an organization at least once between September 2010 and September 2011 (the most recent full-year numbers available). The median time spent volunteering is about fifty-one hours a year.
If we want to calculate the economic value of volunteering as something beyond zero, it helps to think of the foregone income as donated income. When a mom volunteers to coach her son’s soccer team, for example, that service is not worth zero just because she is not paid. She is performing a valuable service and foregoing the income she would otherwise receive. That income is donated back to the team.
The Internal Revenue Service does not currently impute this foregone income to taxpayers. But it certainly could do this. It could recognize that the volunteer is receiving and then donating an income. Under our current system, obviously this income should be deducted because it is charitably donated. Absent a charitable deduction, however, this income should probably be taxed. . . .
What makes taxing volunteer work seem so wrong is that we don’t think of time spent volunteering as producing income. Even if it is the “economic equivalent” of receiving income and donating it back, that’s doesn’t capture our feeling for what is happening when someone volunteers his or her time. We think of the labor provided as genuinely free.
This logic, however, should extend to charitable giving as well. When income is earned and then donated to a charitable organization, it isn’t really any more like personal income than the income that is foregone by the volunteer. In either case, the value of the services wind up with the charity rather than the individual. Should the source of the income—your employer rather than the charitable organization—really make all that much of a difference?
To put it slightly differently, when you donate an hours worth of your salary to a charitable organization, it is the economic equivalent of you having volunteered for an hour. You performed the labor, the charity got the value of that labor.
December 18th, 2012 | 3:28 pm
That same rationale would also apply to painting my house myself. If I hire a painter instead, should that also be tax deductible?
The income tax taxes all work-for-pay and exempts all volunteer activity. It’s the most just system of taxation we’ve come up with. The “fairer” system would tax “leisure” also but that would be extremely regressive.
December 18th, 2012 | 4:06 pm
To monetize volunteerism is an awful idea, ranking right up there with Prohibition and New Coke. Imagine the policing efforts to monitor quantity or quality of efforts. Why can’t people just give of their time without an expectation of something in return except feeling good about it.
December 18th, 2012 | 4:57 pm
The charitable deduction–along with the child tax-credit and the earned-income credit–are two of the more reasonable aspects of the tax code. Nonetheless, the deduction requires reform–but perhaps a reform different from the one designed in Bowles-Simpson.
For one, only charitable non-profit organizations that actually function and work as charities ought to qualify for larger deductions. In concrete terms, only those who donate to non-profits that allocate fifteen percent or less of the funds they receive toward anything other than operating cost directly related to charitable services and work (i.e. employee compensation, advertizing) qualify for a deduction.
We can split this deduction into a smaller size for donations to non-profits those who keep 15-10% of funds beyond basic operating-costs, and a larger deduction for charities that take in less than 10% of funds beyond basic operating costs.
Another deduction, smaller than the charitable deduction(s), ought to be available for donators to what we can term non-charitable non-profits–organizations that qualify as non-profits but not charities, non-profits that keep more than 15% of funds they take in beyond basic operating costs. Many higher-education institutions are more accurately termed “non-charitable non-profits.” Those who donate to such organizations would receive a deduction, more similar to a tax-credit, worth less than the charitable deduction in both its smaller and larger variants.
We ought to place a limit on the definition of “non-charitable non-profit” as well. Organizations that retain sixty-percent of the funds they take in above basic operating costs qualify as for-profits–organizations that retain below this benchmark and above fifteen person of funds taken in beyond basic overhead costs qualify as ‘non-charitable non-profits.
The exact value of the deductions for donations to both “charitable non-profits” and “non-charitable non-profits” is another matter, one beyond the scope of this comment and my competency. Although the term “non-charitable non-profits” might off-put some, the intent is not to vilify anyone. Rather, such organizations–according to their missions and operating models, are more accurately institutions that cover expenses via alternate mechanisms to profit-earning: fund-raising,etc.
Also, while deductions for charitable giving provide a helpful nudge and provocation to donate, charitable giving ceases to exist as charity once giving is calculated to self-gain. Thus, a limit ought to be placed on the number of deductions one can receive for charitable giving. One can of course donate to as many charities as he likes, yet not all of those donations–beyond giving to a certain number of charities–will result in a deduction.
The threshold number of charitable giving, beyond which one will cease to qualify for deductions, is another matter beyond the scope of this comment.
Maybe this idea is entirely wrong-minded yet, even if one disagrees with this modest proposal, one cannot really deny that too many organizations–ones that take in and retain funds well above basic operating expenses–wrongly qualify as charities. Neither these organizations ought to receive a tax-exemption for essentially, in actuality, operating as for-profit businesses nor ought their patrons receive a deduction for funding their rackets.
December 19th, 2012 | 6:05 am
There is, surely, a more fundamental question. Should the state forego taxes (for the the expenditure of which it is accountable to the electorate) in favour of organizations which, however worthy, are not democratically accountable for the way they spend their money?
December 19th, 2012 | 9:48 am
I like the question posed by Michael PS. It gets close to the core of the issue. When the state provides the bulk of the “charity,” through social services, then the state finds itself in competition with other “charities,” for resources. Sooner or later the state will win. As less people attend churches and otherwise benefit from private charities rather than public ones offered by the state, the votes will soon be there in favor of “democratically accountable charity” as Michael puts it. That said, I am not sure the term “democratically accountable” is an apt descriptor. Privately held charities by design are democratically accountable because there is no compulsion to give to them. If the people don’t give to them, they shrivel up and die. Not so much wrt the state programs.
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