Thursday, September 10, 2015

If You Like Your Tax Break ...

... You can't keep it. Here's why.

There's been a lot of discussion in news and economics circles this week about the tax plan put forth by presidential aspirant Jeb Bush. I'm not gonna get into the details; the Tax Foundation and Matt O'Brien of The Washington Post offer their analyses. I'd like to focus on one emotional issue: the tax deduction for charitable giving which Mr. Bush maintains in his plan.

Len Burman of the Tax Policy Center was doing some deconstruction of Mr. Bush's on Twitter Tuesday night as I followed along while reading articles and watching the Orioles. I commented on one of Mr. Burman's tweets and he responded. (BTW – I am a pretty optimistic guy.)
For every tax break – regardless of its purpose or benefit – there must be a ratcheting up of tax rates to collect the same tax revenue. Lemme give you two admittedly simple examples.

First, consider two people with the same income, same tax rate, and same deduction as a result of charitable giving. Each person makes an additional dollar of income with a marginal tax rate (that is, the rate on the next dollar of income) of 20 percent. Each person now has 80 cents of after tax income, If each subsequently claims a tax deduction for giving that dollar away, each person now has a dollar less in their pocket and the government has 40 cents less revenue. If it is to make up for revenue lost, the government must raise rates on income earned before that last dollar.

You can argue that the charity deserves those $2 more than Uncle Sam "deserves" his 40 cents but that's another discussion. Let's focus on the math and tradeoffs.

Now, let's look at the same two people but only one person takes a deduction. The giver to charity has one dollar less but the charity has one dollar more; the nongiver has but 80 cents to spend as they wish. Again you could argue that the dollar spent on charity is more beneficial than the 80 cents spent on candy for instance, but that's not the point: each person still receives the same level of government services but the nongiver is paying 20 cents more for the same services.

Commonly referred to as "charitable organizations", groups qualifying under Internal Revenue Code section 501(c)(3) are eligible to receive tax-deductible contributions including online journals and "dairy herd improvement associations".

Will Mr. Bush's tax proposal promote economic growth? I have no idea and that's not the point here. Individual actions and choices should not affect the amount of tax they pay for the services they receive. Likewise the basis of the tax – type of income or type of consumption – should not affect the amount paid: a dollar earned from the sweat of my brow or the heft of your wallet should be treated equally.

No one questions that charitable giving is worthwhile but it's certainly not charitable to treat individuals with bias. It's your choice to give; don't make me pay for your generosity. Charity should not begin with a tax break.