Conservative critics of the government safety net carp about faceless bureaucrats tossing around taxpayers’ money. Few talk about the program that spends $42 billion a year to deputize Joe and Josephine Taxpayer themselves in the war on poverty.
Practically since the birth of the modern income tax, the deduction for charitable donations has encouraged taxpayers to open their wallets for the needy and other causes. Those who have enough deductions itemize (including for charitable contributions to itemize) get the gold of a tax break at the end of their rainbow of generosity. Costing Uncle Sam that $42 billion in foregone tax collections, the charitable deduction is embraced by many other countries as a goad to giving. But this tax season, the Republican tax bill that President Trump signed in 2017 curtails the deduction.
I was no fan of that bill. Were Trump to ask me, I’d suggest a radically simpler tax code, with a return that could fit on a postcard and a few low rates. I’d lose the GOP fixation on tax cuts for the wealthy.
And I’d deep-six virtually all credits and deductions — including the charitable deduction.
[The GOP tax bill] was a vehicle for the party’s dream of unburdening rich people of their fair share of paying for government.
Itemizing makes financial sense when the sum of all your deductions exceeds the standard deduction. For 2018, the Trump bill almost doubled the standard deduction, to $12,000 for individuals and $24,000 for married couples. Come April, fewer taxpayers will have deductions beyond those higher, harder-to-top thresholds, rendering itemizing pointless for many.
Whereas 46.5 million households itemized their deductions in 2017, it’s estimated that just 18 million will do so this year. As a result, charitable donations are expected to drop by up to $17 billion.
That probably won’t keep President Scrooge awake at night. But it shouldn’t cost kinder people sleep, either, as the charitable deduction never encouraged charity from many taxpayers anyway.
Even before the new rules, only 30 percent itemized. In 2011, of the $300 billion donated to charity, only $175 billion was deducted; the rest either came from non-itemizers or went unreported to the tax man.
Moreover, the tax bill’s supposed disincentive to charity isn’t as disincentivizing as it appears. That’s because tax experts, who have a hoary tradition of helping clients game the tax code, have been busy devising workarounds to deal with the new obstacles to giving.
One such tactic, known as “bunching,” involves upping one’s donation and making it every other year. CNBC offered an example: A donor who used to give $5,000 a year now can donate $10,000 every other year. This will increase her itemizing above the standard deduction in her donating years; in off years, she can take the standard deduction.
If you want to help those who have the least, bolstering or reforming the federal safety net would do more.
Still, what about that $17 billion that won’t go to charity as a result of Trump’s tax tweaks? Isn’t that meeting needs that the government would have to address if donors weren’t so generous, and don’t they deserve the break in return?
No and no.
Only one-third of donations go to the poor; the bulk support things like education, the arts, animal welfare, environmental groups and churches (those use some but not all of their budgets for social services). You might support these causes; but you can’t defend them as directly alleviating the suffering of poverty.
It galls tax-cutting ideologues to hear it, but such little bang for the buck is endemic to tax subsidies generally. That the charitable deduction triggers underwhelming donations for every dollar of lost government revenue highlights a simple fact: If you want to help those who have the least, bolstering or reforming the federal safety net would do more.
And as a deduction, the charity tax break’s value increases with the income bracket of the giver. This isn’t as noxious as other tax subsidies for the wealthy — it buys a little charity, after all — but it’s still a tax subsidy for the wealthy.
The GOP tax bill was never meant to promote charitable giving. It was a vehicle for the party’s dream of unburdening rich people of their fair share of paying for government. Massachusetts Democrat Richard Neal, the chairman of the tax-writing House Ways and Means Committee, says he’ll seek reconsideration of the tax bill.
Good. In the meantime, remember that there are better ways than the charitable deduction to make real the words, “Blessed are the poor.”