January 27, 2012
The Presidential Candidates' Tax Profiles: Corporate Tax Reform or Charitable Tax Deduction Reform?
Posted by Christine Hurt

Because I'm teaching Corporate Tax this semester, I'm probably poring over the "How Much Tax Does Romney Pay?" discussions.  Yesterday, my friend and former colleague Miranda Fleischer was quoted in an article not about the passive income rates that drive down Mitt Romney's (and others) effective tax rate, but about his charitable deductions.  Miranda has written extensively about the whys and wherefores of the charitable tax deduction.  Her latest is Equality of Opportunity and the Charitable Tax Subsidies, 91 B.U. L. Rev. 601 (2011).

The candidates' tax returns have revived discussion about carried interest and the 15% tax rate of dividends and capital gains (see the other Professor Fleischer), but at least Romney's tax profile reminds me of some of the foundational questions of why we have the charitable tax deduction.  Romney and his wife are very generous with their charitable contributions (they gave 16.4% of gross income, more than other filers with similar income).  Newt Gingrich, on the other hand, donated less money as a percentage of income than even the average taxpayer, even though his AGI was over $3 million.

One of the questions surrounding the charitable tax deduction is why should the government subsidize charitable giving.  If we believe that the deduction prompts taxpayers to give 30% more or something like that than they would otherwise give, the government is generally giving a partial match to taxpayers's pet charities.  Miranda has in a series of articles fleshed out the philosophical reasons why government subsidization is probably a good idea.  But I wonder whether it's necessary.  Without the deduction, would taxpayers generally be less generous by 30% or so?  Would we still donate to our religious institutions, alma maters, food banks, women's shelters and legal aid clinics without it? 

I think the answer for the Romneys is yes.  They probably donate to their church out of a mixture of duty and love for their church, and a deduction wouldn't change that.  According to Miranda, the Romneys also aren't giving charitable donations in the most tax-advantaged way, so lowering their tax bill does not seem to be a goal of their generosity.  Of course, you can say that with the Romneys' wealth, the marginal utility of the deduction may not be the same as for the rest of us.  So, what about the middle class (or the other 99%, depending on your choice of rhetoric).  Do we give or give more generously because of the tax deduction?

I think business law can provide insight here.  Look at Kiva.  If you make a "loan" to an entrepreneur through Kiva (which it makes through its foreign partners), you do not receive interest, but even that foregone interest is not tax-deductible.  Neither is the principal amount, even if you do not cash out after being repaid but re-loan instead.  (See Sarah Lawsky's Money for Nothing:  Charitable Deductions for Microfinance Lenders, 61 SMU L. Rev. 1525 (2008).  But, Kiva was pretty successful in attracting what were essentialy non-deductible charitable donations.  Now, Kiva invites patrons to make either loans or tax-deductible donations for administrative expenses of Kiva.  An interesting question is whether the addition of the tax-deductible option lessened the amount received as loans and what the resulting ratio between them is.  Kickstarter, a crowdsourcing site for artists to fund new projects, raises money without the promise of a tax deduction (though some of its artists do have 501(c)(3) organizations).  Do the tax-deductible projects get funded quicker and more fully?  Are there other perks that donors prefer?  Production credit?  Special access or invitations? 

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