I was thinking about this yesterday. Our elected officials love to use money to help the “less fortunate”. They are either “compassionate conservatives” or “progressive”, both of which believe that rich people’s money should be redistributed to poor people.
So how much hypocrisy can we point out if we suggest that in addition to excluding charitable giving from taxable income, we also offer a 25% tax credit for it?
Think of it this way. Let’s assume that the only deduction allowed by law is for charitable giving, and $100,000 of income is in a 30% tax bracket, while $30,000 income is in a 10% tax bracket.
So the guy with the $100K income, assuming no charitable giving, owes $30K in taxes to the government. If he gives $10K to a charity, his taxable income drops to $90K, making his tax bill $27K. Obviously he hasn’t come out “ahead” on the deal, because he’s given $10K to save $3K in taxes.
The guy with $30K owes $3K in taxes. Likewise, the $30K person decides to tithe 10% to his church, or $3K. In doing so, he saves $300, so his tax bill is $2700 instead. Again, he hasn’t come out ahead, because he’s given $3K to save $300.
However, because the richer person is in a higher tax bracket, he gets a greater tax reduction per dollar donated than a poorer person. He reduced his taxes by 30% per dollar he donates, while the poorer person only reduces his taxes by 10% per dollar. What if we added a 25% tax credit (on top of the exclusion of donations from taxable income), in order to help spur on charitable giving? (Note, I’d make the tax credit only apply until you get to $0 taxes paid, not allow you to get a refund for taxes never paid).
So in the first scenario, the rich person donates $10K and thus reduces his tax burden by $5500. Again, he’s still not coming out ahead, but instead of owing $27K in taxes, he owes $24,500. Essentially, by adding a tax credit, he gets a benefit as if he had donated a little over $19K. So from a tax perspective, it’s like slightly less than doubling his donation.
In the second scenario, though, the person who donates $3K reduces his tax burden by $1050, making his final tax burden $1950 instead of $2700. Again, he hasn’t come out ahead, because he donated $3000 to save $1050. But his $3K donation has the same effect on his tax burden as if he had donated $10,500, making the effect on his tax burden of more than tripling his donation.
To make a change like this encourages charitable giving, while giving lower income people greater tax reduction per dollar donated than higher income people. To elected officials who like to play God with our paychecks, while “helping the poor”, this would make a lot of sense.
If our elected officials really wanted to encourage charitable giving, which many of us outside of Congress would argue is much more effective at helping people than letting government have the money, we could get a lot of people in Congress to sign on to this proposal. However, I doubt it will happen. I think our elected officials believe that all money for good purposes should flow through Congress, and the idea of interrupting their own revenue stream in favor of private charity goes against everything they stand for. After all, they’re more interested in power and control than results, as we’ve seen from pretty much every government program ever designed.
» Read more