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The ‘Tax Base’ Justification for the Charitable Deduction

2 min readBy: Andrew Chamberlain

In a recent paper, we argue that the justification for the charitable deduction is based on what economists call market failure—that is, it’s designed to subsidize charities that produce public goods, which wouldn’t otherwise survive.

But some argue there is another justification for exempting charitable gifts from taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. . They argue that gifts to charities shouldn’t be in an income tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. to begin with. Why? Because charitable contributions aren’t “consumption,” goes the argument, they just reduce donors’ ability to consume. Therefore, donors should be taxed as if they’d never earned the money that they donated.

For at least two reasons, this justification is not pursuasive. As economist and public finance guru Harvey Rosen writes:

“Some argue that charitable donations constitute a reduction in taxable capacity and, hence, should be excluded from taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. . However, as long as the contributions are voluntary, this argument is unconvincing. If people don’t receive as much satisfaction from charity as from their own consumption, why make the donation in the first place?” (Public Finance, 6th edition, p. 350)

As long as gifts are voluntary, they’re not economically different from other kinds of consumption. How is a $50 donation to United Way in exchange for the intangible benefits of supporting a good cause any different from spending $50 for an opera ticket for the intangible pleasure of the music? Clearly it isn’t. By voluntarily choosing to make gifts, people are revealing that they’re better off by doing so, not worse off. So it clearly counts as income. (For more on this see Mark P. Gergen, “The Case for a Charitable Contributions Deduction,” Virginia Law Review, Nov. 1988 pp. 1393-1450.)

Second, the actual Congressional Record shows Congress adopted the first charitable deduction mainly to subsidize charities, not to exclude gifts from the tax base. From Senator Henry Hollis in the 1917 Congressional Record:

“Usually people contribute to charities and educational objects out of their surplus. After they have done everything else they want to do … if they have something left over, they will contribute it to a college or to the Red Cross or for some scientific purposes. Now, when war comes and we impose these very heavy taxes on incomes, that will be the first place where the wealthy men will be tempted to economize, namely, in donations to charity.” (55 Congressional Record 6728, 1917).

Their goal was to ensure that the recently enacted 1913 income tax wouldn’t suppress giving to charity. That’s a subsidy argument, not an argument about the tax base under an income tax.