Tax Reform and Charitable ContributionsPosted: February 14, 2013
The debate over the charitable deduction mistakenly pits those who acknowledge that the government needs to get its budget in order against those who recognize the extraordinary value of the charitable sector. The tax subsidy for charitable contributions should be treated like any other government program, examined regularly, and reformed to make it more effective. In fact, the charitable deduction can be designed to strengthen the charitable sector and increase charitable giving while costing the government the same or even less than it does now.
What’s the trick? Take the revenues spent with little or no effect on charitable giving, and reallocate some or all of them toward measures that would more effectively encourage giving.
For example, to increase giving Congress can do any or all of the following:
- allow deductions to be given until April 15 or the filing of a tax return;
- adopt the same deduction for non-itemizers and itemizers alike;
- consider proposals to ease limits on charitable contributions, such as allowing contributions to be made from individual retirement accounts (IRAs) and allowing lottery winnings to be given to charity without tax penalties;
- raise and simplify the various limits on charitable contributions that can be made as a percentage of income;
- reduce and dramatically simplify the excise tax on foundations; and
- change the foundation payout rule so it does not encourage pro-cyclical giving.
Congress can more than pay for these changes with little or no reduction in revenue if it would:
- place a floor under charitable contributions so only amounts above the floor are deductible (economists generally believe that some base amount of contributions would be given regardless of any incentive, thus floors have less effect on giving);
- provide an improved reporting system to taxpayers for charitable contributions;
- limit deductibility for in-kind gifts where compliance is a problem or the net amount to the charity is so low that the revenue cost to government is greater than the value of the gift made; and
- to help the public monitor the charitable sector, require electronic filing by most or all charities.
Budget and tax reform are now unavoidably intertwined. When it comes to the tax law concerning charitable contributions, we can do a lot to make our subsidy system more effective from both a fiscal and a charitable sector standpoint.
For more details, see my congressional testimony for today’s hearing on “Tax Reform and Charitable Contributions” before the Committee on Ways and Means.