One of the things that gets batted around when we talk about tax reform is abolishing the charitable deduction. This is a bad idea.
Let's imagine what really wiping out the tax advantage of giving to charity might look like.
We'll start not with the cash donations of the wealthy because, as we'll see later, these are much harder to tax than you might imagine. Instead, let's start with another deduction that most of us don't even know exist: the deduction for volunteers.
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.
Not taxing this income would disproportionately reward people in the prime of their work life. By age, 35- to 44-year-olds and 45- to 54-year-olds are the most likely to volunteer (31.8 and 30.6 percent, respectively), according to Bureau of Labor data. People in their early twenties are the least likely to volunteer, at 19.4 percent. This would mean that the benefit of the untaxed imputable income would go mostly to those well-established in their career, those who would tend to have higher incomes. It would be regressive.
Not taxing imputable income from volunteering would also have a racially disproportionate impact. "Among the major race and ethnicity groups, whites continued to volunteer at a higher rate (28.2 percent) than did blacks (20.3 percent), Asians (20.0 percent), and Hispanics (14.9 percent)," the Bureau of Labor reports. That means that whites would benefit from this exclusion far more than other races.
If it sounds ridiculous to put a tax on volunteering that's probably because it seems wrong to tax income that can only be imputed. It doesn't seem like income at all. But we do tax imputed income already. We tax life insurance and healthcare benefits given to spouses by employers as income, even though the employee didn't receive any income. Family courts will impute income in some cases where a spouse claims he or she earns no income to avoid child support payments. This isn't something foreign to our system at all.
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.
What's more, this equivalence actually makes it much easier to dodge a tax on charitable donations than a lot of tax analysts suppose. Let's say we strip out the deduction but a wealthy executive still wants to make a charitable donation at the same level, without incurring the additional tax burden. The solution to that is just to have the executive voluntarily reduce his income by the amount of the donation, then direct that the money be given to the charity and expensed as marketing.
The effect of this would be to dramatically change the way charity is conducted in the U.S. Corporate cause donations would be deducted as marketing expenses, giving corporations more influence over charitable giving. Established charitable organizations would lose money and influence to corporate forces. This of it as having a similar effect as campaign finance laws empowering corporate PACs and Super PACs.
Let's not start taxing volunteering. But lets not start taxing charitable deductions either.
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