Charitable Giving Deductions

In 2013, US citizens gave an estimated $335.17 billion dollars representing around 2% of GDP. This was encouraged partly by tax incentives, which offer deductions for charitable giving. The Treasury estimated these incentives cost the government $50 billion a year. These laws are common and are implemented in many developed countries. The question should be asked though: why? There is doubtless a study that has calculated the marginal impact of increasing deductions based on the size of donations but it would be hard for me to believe that $1 larger deduction caused $1 or more to be donated than otherwise would have. More importantly perhaps is that charitable giving is any giving to a non-profit organization. The bar for obtaining non-profit status in the US is impressively and deals mainly with the structure of the organization rather than its cause or effectiveness (the main restriction is that it can’t be political.) Why then should the government continue to give these tax breaks? To understand more thoroughly we should likely think of the alternative without the deductions.

If we are to assume that without the tax breaks, government spending would be the same, then there are two key outcomes: (1) the government has X more money (2) Y less money is given to non profits. It seems then that this policy would make sense in two separate circumstances: either Y>X (which I have argued as unlikely above) or the impact of Y is greater than the impact of X. This would suggest that the rich are far more efficient at giving than the government. Neither of these seems likely and so I am confused by the motivation. We can maybe agree that philanthropy is important but it seems that if the government wants to encourage that, it would be best for them to undertake more philanthropic projects or allocate that money to not for profits themselves. The tax breaks make little sense and encourage philanthropy at a large cost. In some way they also divert attention by magnifying the impact of the richest while not acknowledging the help that the rest of the American public has given them in allowing the donations. As I’ve stated, eliminating the deductions would remove funding from some not for profits, so the government would have to step up and prop up NGOs with extra giving for a period, but they would still likely have excess savings. In sum, charitable giving is good, but the government should do it itself or not at all.

-Mac

 
Source: http://www.economist.com/node/21556570