Does the Charitable Contribution Deduction Unfairly Favor the Rich?

Does the Charitable Contribution Deduction Unfairly Favor the Rich?

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You have to have class-warfarism steeped in the marrow of your bones to criticize a person for giving too much money to charity. But this is precisely what pro-taxers do when they claim that the rich unfairly benefit, at the expense of the poor, from the charitable contribution deduction.¹

Howard Gleckman ² of Tax Vox writes in Not All Tax Breaks are Created Equal (emphasis added):

The Charitable Deduction:

Almost no households making less than $50,000 get any tax benefit at all from the charitable deduction. It is not because they are not generous givers—this group gave about  3.5 percent of their income in 2009, more than the 2.4 percent contributed by those making $100,000 or more. Instead, it’s because they can only take the deduction if they itemize, and most households don’t. But while only 3 percent of the benefit of the charitable deduction goes to those making less than $50,000, nearly 85 percent goes to those making $100,000 or more, and more than one-quarter goes to the 0.3 percent of households making $1 million or more.

Gleckman’s analysis here is wrong on several fronts, not the least of which is because it ignores the fact that taxpayers who do not itemize are allowed to claim a standard deduction regardless of whether or not they have a single cent of itemizable deductions.

The only reason a taxpayer who has charitable contributions doesn’t itemize is because his standard deduction exceeds the cumulative amount of his itemizable deductions. When you itemize you are only getting what you actually spend in itemizable deductions, but if you have no itemizable deductions or your itemizable deductions are less than the standard deduction, you still get the standard deduction.

This means that those who don’t itemize are getting a break because they are getting a deduction for monies they have not spent. Itemizers, on the other hand, only get a deduction for amounts they have actually spent.

Consequently, the criticism of Gleckman and others simply boils down to this:

It is unfair that rich taxpayers get a deduction for charitable contributions because they have more money to give to charity.

But this criticism applies equally to just about every other deduction in the tax code as well:

  1. Rich people have bigger mortgages and, therefore, get a greater benefit from the mortgage interest deduction;
  2. Rich people have bigger property tax bills and, therefore, get a greater benefit from the real estate tax deduction;
  3. Rich are more likely to have their own businesses and, therefore, get a greater benefit from the rule that allows a deduction for ordinary and necessary business expenses.

And let’s not forget that Gleckman’s analysis suffers from the typical, but still fatal, flaw of failing to recognize that the rich will always benefit from tax deductions to a greater extent than the poor simply because the rich pay more taxes in the first place.

If you want to stop the tax-paying rich from receiving greater benefit for tax deductions than the poor, you will have to do two things:

  1. Make the tax rates the same for the rich and the poor; and
  2. Make the poor pay taxes.

By the way, the lion’s share of charitable contributions are used to directly benefit the poor. Which begs the question: Why would the left want to limit or reduce anything that benefits the very segment of society they stridently claim to serve?

Could it be that what liberals really want is power and control? Could it be that what they really want is control over how your money is spent so that they, rather than you, can get credit for helping the poor? Could it be that they want the credit for helping the poor so that they can continue to claim a monopoly on compassion, even though that compassion is funded with someone else’s money?

Read Estimated Impact of Obama’s Charitable Deduction Proposals Detailed to see what the scale-back of the charitable contribution deduction in the name of egalitarianism will due to recipients of private charity.

A Word about the Earned Income Tax Credit and Forced Charitable Contributions

Many people who do not get the benefit of a charitable contribution deduction receive money from the government via the Earned Income Tax Credit (EITC). The EITC is a refundable credit which means taxpayers who have not contributed a single cent for the functioning of government are eligible for it. Like all refundable credits, those Americans who actually pay taxes fund the EITC. Consequently, the EITC is a charitable contribution that is forced on tax-paying Americans for which they get no charitable contribution deduction.

Footnotes:

¹  The pro-government, pro-tax left considers private charity a threat to its agenda of increasing the size of government and reducing income inequality. Even though study after study shows the American rich to be among the most benevolent class of people in the civilized world, the left has the testicular fortitude to accuse them of greed and selfishness for wanting to preserve the charitable contribution deduction. When it comes to class warfare, the ends justify the means.

²  I don’t put Mr. Gleckman in the above category at all. I think he is a serious student of taxation and economics and does not suggest that the charitable contribution is unfair for any other reason than that he believes it to be unfair. I think he is wrong, of course, but not politically motivated. The same cannot be said for others who have made the argument.

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About Peter Pappas

Peter is a tax attorney and certified public acccountant with over 20 years experience helping taxpayers resolve their IRS and state tax problems.

He has represented thousands of taxpayers who have been experiencing difficulty dealing with the Internal Revenue Service or State tax officials.

He is a member of the American Association of Attorney-Certified Public Accountants, the Florida Bar Association and The Florida Institute of Certified Public Accountants and is admitted to practice before the United States Tax Court, the United States Supreme Court, U.S. District Courts - Middle District of Florida

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Comments

  1. Foggy World says:

    I spent most of yesterday looking at what the Mormon Church does with its billions of dollars and was taken aback really to see that very little of what they receive is spent on people. They own huge tracts of land in Wyoming and Florida and have just completed a mall that will end up costing $4 billion dollars. They own a resort in Hawaii and on and on it goes.

    Then I found that the State with the highest personal bankruptcy rate is amazingly Utah where I had always thought folks took care of one another. Wrong.

    The Mormons are rigidly tithed ten percent – even when the breadwinner loses his job. The money for the Church is supposed to be paid – even before groceries!

    So I am getting concerned about the “charities” themselves that thrive on this deduction and wonder if it might in fact not be better to do away with it. Yes, the government would get more which right now they need and they would have to pick up some slack that the better run groups take care of.

    But institutions like the Mormon Church which refuse to publish financial statements are beginning to trouble me. Yes, they separate their accounts into profit and non-profit but I don’t think the donor gets to select the account he or she wants her money put into.

    And I don’t mean to pick on that one church because we out here often do not know the distributions made by charities we donate to. Also while researching I found that the Vatican has the most stable economy in the entire world! Now I realize there has been an effort made to correct this problem but it obviously isn’t picking up all the pieces.

  2. Foggy,

    You want to “correct” the stable economy of the Vatican?

    I have more faith in private charities to use their money wisely then I do the federal government and so, apparently, do Warren Buffett, Bill Gates and hundreds of other pro-tax mega-billionaires.

  3. I’m a successful engineer who simply chooses not to own a house so I end up taking the standard deduction. I give a few thousand a year to charity and receive no tax benefit. Kinda makes me not want to give.