Every year, the government loses more than $100 billion in revenue due to charitable contribution deductions and the tax-exempt status of churches. If we want to get our fiscal house in order — and help avert the fiscal cliff — we should eliminate the deductions and start treating churches like the corporations they are.
Charitable deductions aren’t new. For almost 100 years, the federal government has granted tax relief to individuals for making contributions to charitable organizations. The original intent was to subsidize groups that provided a private alternative to government programs.
Today, if you make $100,000 a year and give $10,000 to charity, your “adjusted gross income” is $90,000, which is all you would pay taxes on. That’s because money, assets and goods given to a qualified nonprofit organization can be deducted against gross income.
Since the deductions work through reducing taxable income, they’re a regressive policy. Marginal tax rates increase with income. What this means is that if you are in a higher tax bracket, you get a larger tax break for every dollar you give.
Thus, high-income people benefit disproportionately. Furthermore, many households earning less than $60,000 a year don’t itemize their deductions and thus miss out entirely.
Another way to view the regressive nature of the deductions is that they effectively allow rich people or organizations to redirect more potential government revenues to their private causes than less well-off people can.
For example, Chick-fil-A’s donation of almost $2 million to anti-gay groups in 2009 through its charity arm WinShape is analogous to it directing the government to spend $600,000 to discriminate against the LGBT community.
Of course, eliminating the deductions will have an impact on giving to charitable organizations, but the effect may not be that large.
Take giving to Penn. Most alumni understand that the value of a Penn degree depends on maintaining the University’s reputation, so they give to protect their investment. (This is the same reason alumni willingly give up time to interview students).
Others are forward-looking — they want to do anything they can to promote their children’s legacy status. And then there’s the other type of legacy — the kind that gets a school or building named after you.
Finally, some people might actually be altruistic — they loved their time at Penn and want to enable others to experience the same joy they did.
At the margin there may be some effect, but I suspect — and academic research seems to support — that the effect on giving to nonprofits will not be catastrophic.
Not all recipients of these deductions are individuals — churches benefit even more from the current tax code.
Churches receive the same treatment as nonprofit organizations. However, according to estimates, churches only allocate about 15 percent of their revenues toward charitable work. The remainder essentially covers the operating expenses (think salaries and parsonages) of running the church.
If we think that nonprofits should enjoy special tax treatment because they provide a private alternative to government programs, should we extend that treatment to the non-philanthropic arm of churches?
In order to eliminate this gray area where churches operate and to respect the separation of church and state in our country, we need to end the special tax treatment they receive.
After all, the tax code also prevents nonprofits from engaging in political campaigning. Didn’t the churches advocating against the passage of gay marriage in Maryland this year also engage in political campaigning? On occasion, there have been notable cases where churches violate this rule, yet these churches are rarely punished.
The Congressional Budget Office estimates that the charitable contribution deduction costs over $41 billion in tax revenue per year. A one-year estimate of the total tax revenue lost because of the tax-exempt status of churches is $71 billion.
Extrapolating forward (in the optimistic way politicians tend to do), eliminating these two special tax treatments would save more than $1.1 trillion over 10 years. It seems like a simple solution to help us balance the budget and get the country back on track.
Kurt Mitman is a sixth-year doctoral student from McLean, Va. His email address is email@example.com. Follow him @SorryToBeKurt. “Sorry To Be Kurt” usually appears every other Thursday.