Nov 30, 2012 4:41 PM GMT
Americans will pay roughly $40 billion less in taxes in 2012 due to the charitable deduction they take, according to Congress's Joint Committee on Taxation. That could be hard for lawmakers and the White House to ignore as they search for ways to cut future deficits.
There is no specific plan to eliminate deductions for charitable giving in current talks. Instead, proposals that have been floated focus on capping overall deductions.
The White House in the past has proposed limiting deductions to no more than 28% of income for families making $250,000 or more. Republicans including former presidential nominee Mitt Romney have suggested limiting deductions to a specific dollar amount. Others have suggesting a "haircut" option, letting taxpayers claim, for example, 80% of their current deductions.
Different types of donors favour different things. Rich American donors give a lot less to religions than less-well-off ones do. Instead, “Taxpayers with incomes over $1m tend to favour higher education, health, and the arts,” notes Charles Clotfelter, an economist at Duke University, in a recent paper.
The American tax system, he points out, “gives the wealthiest taxpayers a disproportionate role in allocating public resources.” In 2008, individual Americans with incomes over $500,000 (who make up less than 1% of taxpayers) accounted for 18% of all income and made almost a quarter of all charitable donations. By contrast, the two-thirds of taxpayers with incomes under $50,000 earned about 20% of total income and made about 20% of all donations. In 2006 taxpayers with incomes over $100,000 received 76% of the total $40.9 billion tax subsidy due to the charitable deduction, although they made only 57% of all donations; those with incomes of less than $50,000 received a mere 5% of the subsidy, despite making one-fifth of all charitable donations.
This unfairness costs a lot of money and in some cases, at least, makes little difference. Warren Buffett recently told The Economist that tax concerns were largely irrelevant to his giving, and that he thinks the same is true of many of his super-rich peers. “I gave $2 billion last year and saved almost $2m in tax.” The “plutocratic bias” also tends to argue against the pluralism case for tax incentives, in that it overpopulates civil society with organisations friendly to, and aligned with, the interests of the wealthy.