Friday, September 28, 2012

The Sacred Tax Deduction

Note: This and the previous post were originally on, this one in December, 2011, but may be of interest also to all of us who give to our churches and claim deductions for the same on our tax returns.

Since early 2009 the Obama administration has been proposing tinkering with the charitable giving deduction as a way to increase taxes on high income folks and increase government revenues, primarily for health care spending. Here is one of the earliest of a torrent of objections, all protesting any reductions in incentives for giving. Just Google “charitable deduction news” for other similar pleas from beneficiaries of the rule. I too am staunchly opposed to any such tinkering with our outrageously complex and unfair income tax code, but I would love to see this and all other deductions, exemptions, exclusions, and credits die as part of a comprehensive reform that would significantly reduce marginal rates, thereby providing economic stimulation, while increasing current tax revenues and giving our budget crisis some immediate relief.

I have always taken advantage of the income tax deduction for charitable contributions and just figured that the government was willingly helping fund my favorite charities, mostly the church I happened to be a member of at any given time. That was when our national budget was pretty close to balanced and our debt was not too burdensome. With the financial crisis we are facing now, I have realized that it is not the government that is helping fund my charities. It is you, my fellow citizens, and I suspect quite a few of you are doing it unwillingly. I know I am not too happy helping fund some of yours.

Entities which qualify for tax-deductible contributions are known as 501(c)(3) organizations, named after the section of the Internal Revenue Code in which regulations for them are found. These organizations must have one of several qualified purposes, and the lists of those purposes and of the qualifying organizations have grown over the years and, without fundamental reform, will continue to do so under continuous pressure of lobbyists and special interests. Below is the current list available at the IRS web site.

The exempt purposes set forth in section 501(c)(3) are
     testing for public safety,
     fostering national or international amateur sports competition,
     preventing cruelty to children or animals.
          relief of the poor, the distressed, or the underprivileged;
          advancement of religion;
          advancement of education or science;
          erecting or maintaining public buildings, monuments, or works;
          lessening the burdens of government;
          lessening neighborhood tensions;
          eliminating prejudice and discrimination;
          defending human and civil rights secured by law; and
          combating community deterioration and juvenile delinquency.

You can probably tell right away why this list concerns me. The strangest idea is government funding of organizations with the purpose of “lessening the burdens of government.” Too many of these purposes sound like titles created to fit something somebody wanted to fund or raise money for. Did Consumer Reports have anything to do with lobbying for the special tax treatment of “testing for public safety?” And I wonder how the efficiency or effectiveness of an organization with the objective of “combating community deterioration” or “advancement of religion” or “lessening neighborhood tensions” will be measured. And while I have a great deal of interesting in promoting the Gospel of Jesus Christ, which involves a lot of giving, not to the government, but to our neighbors, I have no interest at all in the “advancement of religion” which, as the late Christopher Hitchins so eloquently argued, can be quite counterproductive. “Advancement of religion” even seems to me to be a goal inconsistent with our constitution. I’m especially concerned now that global warming seems to have taken on some of the characteristics of a religion.

There are some non-profits which participate in politics or lobbying and therefore cannot accept tax deductible contributions. I’m thinking that a lot of “religious” and "educational" organizations should fall in that category because, while they may not endorse specific candidates, many take positions on political issues that pretty much rule out all the candidates but one. It happens on both the left and the right so this is a non-partisan complaint.

Only taxpayers who itemize deductions and whose contributions plus other deductions fall within certain guidelines established by the IRS benefit from the charitable contribution deduction. In 2009, the most recent year for which such data are available, there were only 34M returns with deductible cash contributions, and they claimed total contributions of $130B. That is 24 % of the returns filed and a little over 10% of total deductions claimed.

The Obama administration proposals leave me with the feeling that the president believes that the purpose of this and other tax deductions is to help tax payers and that these higher-income folks don’t need any help and should therefore have less deduction. It seems to me that the theoretical underpinning of the charitable contribution deduction is not to help taxpayers but to incentivize them to give more. Of course the higher the marginal tax rates the more encouragement such a deduction gives. So the idea of eliminating this and other deductions in conjunction with significant lowering of marginal rates which makes the deductions less valuable seems to me to be a workable strategy for helping solve our debt and unemployment crises. And then we can all take full credit for our giving without depending on our fellow taxpayers to help fund our favorite charities.

And I promise that if such a plan is put in place and begins a steady long-term decrease in our debt as a percent of gdp, I will give away just as much without the charitable tax deduction as I have been giving away with it. If we can get the economy going so I can get a little more income, I’ll give even more. I hope you will all join me in that, regardless of how convoluted our tax code becomes as the tinkering continues.

Stinginess Not Only Alternative to Philanthropy

Note: The material below was posted originally on but seemed to be of interest also to all of us who give to and through our churches and take tax deductions for such gifts.  I have come to believe that is not a good thing and should be given up, along with other "sacred" tax benefits such as the home mortgage deduction in favor of lower marginal tax rates across the board on all  income, including inheritances, elimination of estate taxes, and much simpler tax returns.  Bottom line is that the federal government should  not be in the business of picking winners and losers, subsidizing some of us at the expense of others. More explanation of that here.

In a September 19 WSJ article, Geoffrey A. Fowler reported that more billionaires are signing on to the idea, promoted by Bill Gates and Warren Buffett, of giving away large portions, at least half, of their money.  Well, it is certainly more blessed to give than to receive (Acts 20:35), but whether such largess is a better idea than investing the funds in new GDP-generating, job-creating, and government funding enterprises depends, in my opinion, on what they give it to, how well the recipients manage it, and what other options the donors have for investing the money.

The article included a puzzling and blog-post-inspiring quote from Gordon Moore, 83 year old founder of Intel and author of the famous Moore’s Law:  "…it's a good idea and has shaken loose a lot of money that otherwise would have been tied up for a long time."  Well, only if somebody had it stuffed in a mattress somewhere or in a safety deposit box would it have been “tied up,” because otherwise the money was supporting some endeavor or enterprise already.  

I have no first-hand information about this, but it is very likely that donations of Messrs. Moore, Gates, Buffett, and other billionaires are in the form of shares of appreciated stock, donated unsold to avoid capital gains taxes and estate taxes, to a foundation, which might continue to hold the shares and use the dividends from them to support its work.  So, the money would still be “tied up” in those shares of stock.  Or the foundation might sell the stock and use the proceeds from the sale in some new or existing charitable effort which might even involve hiring a lot of people.  In that case, somebody else will have to come up with money to buy the stock so that equivalent amount of money would still be “tied up,” having previously been “tied up” in something else.  Only if the overall transaction were so large as to result in a decline in the value of the stock would less money end up being “tied up,” and that would be a bad thing.

Don’t get me wrong.  I believe we are stewards and not owners of our financial assets and responsible for using them wisely, voluntarily and systematically giving to worthy causes and people in need throughout our lives and, when possible, being personally involved in the work of the organizations and persons we give to and through.  These billionaires are generous to want to give the money away and spend time managing the gifts, and generosity always trumps stinginess.   

But, stinginess isn't the only option.  If a wealthy person has a good idea for a new product or service that will be of benefit to humankind, investing money and time, hiring people, and taking risks to make it a reality, earning more money in the process, would not be less moral than giving away the money and would be better than irresponsible giving.  Such business development is no less important to the future than, and is a prerequisite for, philanthropy…and for tax revenues too, by the way. 

As an example of the point I am trying to make, think of George Vanderbilt, wealthy grandson of Cornelius, whom I wrote about in a July14, 2012 posting on this blog.  Here is what I said: 
One bit of residue of the Vanderbilt fortune is Biltmore Estate in Asheville, NC, built in the late 1800’s, the “gilded age,” by grandson George. To many it seems to have been an extravagant indulgence (Check out this recent column by Mona Charen.), but he built a town to support the project, pushed the limits on technology, and employed thousands in the design and construction of it, artists and craftsmen and laborers, thereby revolutionizing the Western North Carolina economy. One hundred and forty years later, Biltmore Estate, a working farm and resort, employs 1700 people and hosts a million visitors annually from all over the world. Now that was a real jobs program!

I’m not arguing that George was virtuous for building Biltmore but just that, while he didn't live long enough to enjoy it, it was a worthwhile endeavor that paid off big for other people.  Had he just freely distributed the money to the citizens of Western North Carolina, he would have been widely celebrated and admired at the time but any positive effect would probably have long since disappeared.

Summing up the life of the infamously ruthless Commodore who made his fortune personally networking the nation with railroads and connecting its ports with steamships while driving down the cost of freight, I said this: "The Commodore lived into his eighties, rare for the time, but it’s too bad he couldn't have had an additional productive hundred years. If he had, the United States rather than Japan would have been the leader in high speed trains and Amtrak would never have been created."

A modern day Vanderbilt, smaller scale of course, recently introduced to me by a David Brooks column, is Elon Musk, entrepreneur extraordinaire, founder of Zip2, SpaceX, Tesla Motors, and PayPal and a philanthropist who has signed on to the pledge to give away at least half his fortune.  I just hope he doesn't give it all away before he runs out of ideas because he is a serious job creator and GDP generator.

Bill and Melinda Gates are apparently doing great work around the world in the fields of health and education.  Mr. Buffett is apparently giving much of his money to the Gates foundation.  If they all bring along their personal management skills with their money, I have no doubt that much good will be accomplished, many problems solved, and countless lives improved.  I thank and congratulate them.  But I would also be happy and offering congratulations if they had come up with another economy building, paradigm changing, job creating, idea such as MSDOS which launched the personal computer business and lifted far more people out of poverty than will ever be possible with charitable giving from their personal fortunes.

And here is another option to stinginess.  One curmudgeon billionaire quoted in the Fowler article, German shipping magnate Peter Krämer, said that individuals should not have the right to determine use of such large sums of money, that it should instead be taxed away and its use determined by the government.  I don’t like that idea either, nor apparently does Mr. Buffett since, although he has publicly announced support for a trivial increase in his income taxes, he is responsibly doing whatever he can to keep his vast personal fortune out of government hands which would disperse it completely in just a tad over one day.