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Free Liberal: Coordinating towards higher values

Free Liberal

Coordinating towards higher values

An Uncharitable Tax

If you have a tax, should you have a tax credit?

by Fred E. Foldvary

The federal government budget proposed by the president imposes higher taxes on incomes above $250,000. One of the provisions is that charitable donations would no longer be tax deductible.

As the tax code is now written, it takes $100 of income to donate $100. Suppose the tax rate is 50 percent. The tax would take $50, leaving the taxpayer with $50. But if he donates the $100, his taxable income is reduced by $100, so there is no tax on the donation. It takes $100 of income to give $100 of donations.

Now suppose that the tax deduction is gone. The taxpayers would like to donate $100. He now has to earn $200 to donate $100, since half the $200 of income will be taxed away.

Without a tax deduction, charitable donations get tax punished. When the beneficiaries of donations are the poor and other good causes, these suffer from fewer gifts. A tax on charitable donations hurts the homeless, the hungry, the wildlife that does not get preserved, the ignorant who do not get educated, and all humanity which loses knowledge and more of its natural legacy. When government taxes the rich like this, it taxes the poor.

Advocates of taxing contributions say that donors are motivated to give, and so would donate regardless of the tax. But the law of demand applies to the rich as well as the poor. If something is more costly, people do less of it. If it is more costly to donate, there will be less charity. One does not become rich by not caring about money.

If the purpose of taxing donations is to squeeze more money from the rich, there are better ways to do that. The government could charge the wealthy for the use of other people's property. If a rich guy pollutes the environment, he is using resources that do not belong to him, so he should compensate society for that use. But no, the polluter gets subsidized while the donor gets penalized.

The administration says that they will require polluters to buy permits. But the sale of permits is planned as a one-time deal. After that, if the price of permits rises, the permit holders will profit. The polluters will pay the permit holder instead of compensating society. Moreover, many polluters, such as vehicles, will not have to hold permits.

Governments at all levels also subsidize the rich by increasing the value of their land. Public goods such as streets, highways, transit, parks, schools, fire protection, security, and water all make the affected land more attractive and productive. Up goes the rent and land value. If the landowners had to pay for these services, that would bring the price of land back down. But since most of the cost is paid by taxes on labor, enterprise, and goods, the land value stays up.

So government with one hand taxes the income of the rich while on the other hand gives back the wealth. But the method of tax and give-back matters. It makes a difference whether government says, "give me $100" or "give me $100 only when you donate to charity." In the second case, there will be less donation to charity.

The best policy would be to not have the subsidies in the first place. Polluters would have to compensate for their dumping, and landowners would have to pay to have their sites serviced. That's what would happen in a truly free market. Today we have distorted markets in which people get punished for doing good things such as producing goods, while they get subsidized when they do bad things such as spewing pollution.

Now the administration seeks to make that worse by punishing acts which do the most moral good. By natural moral law or the universal ethic, it is morally good to benefit others. And now government will swoop down and punish acts that benefit others. Punishing donations is evil in two ways, once by imposing an extra cost for doing good, and secondly by depriving the needy from the aid they would otherwise get.

Evidently the administration is proposing this tax on charitable donations expecting Congress and the people to think this is a good policy. Will Americans go along with this? Has everybody gone crazy? If you ever wonder how the world has gotten into such a mess, ponder how can the economic gurus of the government could come up with something as absurd as taxing charity for the poor.

This article first appeared in the Progress Report, Reprinted with permission.

Dr. Fred Foldvary teaches economics at Santa Clara University and is the author of several books: The Soul of Liberty, Public Goods and Private Communities, and the Dictionary of Free-Market Economics.

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It is getting ridiculous. Why is America not up in arms yet? I have been talking to a few liberal friends, the folks that thought Bush was the Anti-Christ, that are starting to not trust Obama. As someone who donates a substantial amount of money to multiple charities, higher corporate taxes, higher personal taxes, and now this, finding money to donate is getting tough. America has always been a country known for charity. Look at the tsunami last year, the American public donated more than every country combined.

# posted at by Pat B

Obama's call to limit high-income taxpayers' itemized deductions for charitable donations and mortgage interest.

Geithner said Obama's plan would cut income taxes for 95 percent of families and 97 percent of small businesses. Raising taxes on couples that make more than $250,000 would make the tax system more equitable, restoring the balance that existed before a series of tax cuts were enacted under former President George W. Bush, he said

# posted at by d matthews

Maybe the purpose of punishing charitable giving is to reduce it intentionally, then later point to the failure of private charity as justification for more gov't spending to make up for the failure. This "bail out" of former recipients increases the ranks of those who are dependent on gov't. They, in turn, are more likely to vote for those who now control their income. You must seriously wonder if the anti-capitalist forces in our country created the failure of the economy so they can now condemn "the market" and force their alternative economic model as the solution.

# posted at by Bill M

I am new to this site. After reading the article and the 3 comments above all I can say is 2 of you got it right and one wants to believe that lollipops and sunshine are going to forever be raining down upon us.
D matthews- you are correct that Ombabm's CURRENT plan will help 95% of American families. What happens when the rich start to figure out the loop holes, shelter their $ or even worse move their wealth out of our country? I'll tell you what will happen... that $250K threshold will begin to lower, then new cap and trade rates and taxes will start to appear (because we must get the money from somewhere), now whose paying???? The poor soul who has 4 kids and making $50k a year. BillM has it right, this is just one more "power play" by the government to control who gets what and the government will decide what issues are "worthy" of receiving funds and those that are not can be funded by the private sector....even though they will no longer be providing tax credits, oh well, sucks to be an "unworhty" cause.

These kind of policies will RUIN America and all that we have worked so hard and fought so long to achieve.
Please write your Congressional Representatives do not take this sitting down we MUST have our voices heard!

# posted at by Jo A

I am a small business owner with 12 employees. We file our taxes as a Sub-Chapter S, meaning that this business is filed on our personal tax return. My wife and I are part of the "wealthiest 2%". Tax us more and that is less money for us to hire people, market products and grow our business.

Take off your blinders. You want to tax WEALTH, then tax wealth, not income.

The best way to keep people out of the upper class to tax their income. You can never get rich when they take over half of what you make. One step forward, one step back.


# posted at by KeithF

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