Panel Paper: Principles and Rationales Behind the Charitable Deduction and Proposed Reforms

Thursday, November 8, 2012 : 10:15 AM
Jefferson (Sheraton Baltimore City Center Hotel)

*Names in bold indicate Presenter

Roger Colinvaux, Catholic University Columbus School of Law, Brian Galle, Boston College Law School and C. Eugene Steuerle, The Urban Institute

Many proposals for budget and tax reform would change the value of the charitable contribution deduction. In addition, many other tax policy reforms, such as changes in tax rates, boundaries defining what types of organizations are eligible as donees, and general rules or overall limits on itemized deductions, can affect its value. What would the effects of such reforms be, and which are the most efficient? This paper examines current laws concerning the charitable deduction, the various rationales that have been offered in its support, and assesses proposed reforms.

The charitable deduction is most frequently lauded as a means of encouraging charitable giving: in effect, the deduction subsidizes charity, a socially desirable good. However, this is far from the only rationale used to explain the deduction. Another is that exempting charitable contributions accurately reflects ability-to-pay, as people who make charitable contributions then have a lower income to use for their own consumption. Other issues include sovereignty, progressivity, and market rather than government decisions about how subsidies should be allocated. The deduction can also be critiqued on different grounds based on these rationales.

Recent proposals to reform the deduction have focused more on increasing revenue than efficiency or charitable incentives. These can be grouped loosely into four categories: caps, floors, credits, and grants. Caps would limit the size of tax expenditures for individual donors, floors would permit deductions only for total annual giving above a set amount, credits would reduce tax by a set percentage of total donations for each donor (sometimes available to non-itemizers as well) and grants involve matching amounts paid directly to the donee organizations. These options vary in “cost-effectiveness”: the measure of increase in tax revenue versus decrease in charitable giving. It is even theoretically possible to increase revenue without decreasing giving, by using a floor while extending the deduction to non-itemizers.

We compare each of these reform options in light of their relative revenue effects and their impact on the underlying purposes of the deduction. In addition, we evaluate the proposals based on enforcement and compliance costs and equity. We further offer preliminary thoughts on alternative reforms, such as changes to the rules for in-kind contributions, which could raise similar revenues as existing options. In the end, the charitable deduction and any reform of it should be judged on the traditional grounds of fairness, effectiveness or efficiency, and simplicity.