No blank slate: the problem with “tax reform”

Last updated on: December 26, 2017 at 10:38 pm by Jane the Actuary

No blank slate: the problem with “tax reform” 2017-12-26T22:38:37-06:00 Jane the Actuary

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In the news today, “Charities worry tax law will cut giving.” As it happens, this is a Washington Post article that was syndicated in the Chicago Tribune, and isn’t available except from the Post; if you’re past your article limit, you can view substantial excerpts at Newsbusters (which I link to without commentary on the Newsbusters site itself).

The gist of the issue: charities are worried that, as a result of the new tax law, they will see a drop-off in the donations they receive, especially from middle-class taxpayers. It’s not that the charitable deduction itself has been removed, per se, as was on the table in prior proposals (or, in a variation, the proposal, under Obama, to limit the benefit of such a deduction to that of the 28% tax bracket level, even for taxpayers paying at higher tax rates). But with the expansion of the standard deduction, it’s become less relevant, as a much smaller portion of the taxpaying public will be itemizing their deductions — according to the article, there will be a drop from 30% to 5% of taxpayers.

There’s plenty of doomsday rhetoric:

“The tax code is now poised to de-incentivize the heart of civic action in America,” it cites Dan Cardinali, president of Independent Sector, an advocacy group for charities. That group featured on its website the headline, “KILL THE TAX REFORM BILL.”

The Post further says,

At the United Way, there is widespread concern because middle-class donors are the charity’s “bread and butter,” said Steve Taylor, vice president for public policy at United Way Worldwide. . . .

The traditional surge in December donations — dwarfing all other months — “tells you everything you need to know” about whether the tax code affects charitiable gifts, said Mike Geiger, president of the Association of Fundraising Professionals.

So, in the first place, nothing in the article suggests that any of these experts have done any modeling of how much “extra” money charities take in due to the tax-deductibility of donations. Do people do the math and say, “I would have donated $500, but since it’s deductible, I’ll factor that in, and give $500 / (1 – my marginal tax rate)”? Does the general notion of “it’s tax-deductible” increase donations, even if it just increases the degree to which people are favorably disposed to donate, even if they are not really mindful of the actual financial implications for themselves personally? I can certainly believe that the deductibility influences timing — it creates a mental deadline of the end of the year, even if it doesn’t really, tangibly matter for which tax year you get your donation, except in a minimal “time-value-of-money” sort of way.

On the other hand, the tax deduction can cost charities, too — knowing any donation for which one has a receipt, will be deductible, but the spur-of-the-moment donations won’t be, can mean that charities which, by their nature, depend on spur-of-the-moment donations, can lose out.

On the third hand, the biggest losers of a diminished-deductibility tax system will be charities that rely on donations-in-kind. 1-877-kars-4-kids promises the “maximum tax deduction” and gets donors for whom the effort-free tax deduction (especially when generously calculated by an aggressive valuation) is worth more than the sale price of a car, combined with the effort of having to actually sell the car. On the other hand, Bill Clinton famously donated his underwear and other clothing and claimed overstated values — but how many of us who donate our used goods to the local thrift store, would now turn around, when there’s no longer a charitiable deduction option, and put in the effort of selling them at yard sales or through e-Bay?

But what it all boils down to is this: the fundamental issue with tax reform, and evaluating what’s right and what’s wrong with any particular proposal, whether it’s that which was just signed into law, or any other such variation, is that we can’t start with a blank slate, and evaluate, in general terms, what the right brackets are, to what extent certain kinds of expenses should be deductible from income, and so on.

Everything is always measured in terms of how any given group fares relative to the existing code. In the case of charities, they’ve structured their fundraising, and their mindsets, around the idea of promoting giving as “tax-deductible.” In the case of real estate, it’s about emphasizing homebuying as a great way to save on taxes. And, more generally, a provision might make a lot of sense from a “good government” point of view, but it’ll be assessed for how a family with two kids, one in daycare, one in college, fares.

And, after all, consider how many such special interest provisions were at risk, but ultimately retained in the tax bill. Schoolteachers can still deduct their $250 in school supply spending, the tax credit for hybrid/electric cars is still there, and who knows how many other benefits are now permanent fixtures?

So, as is often the case, I don’t have a simple answer as to what the impact of this tax code change will be, but I have a hard time believing that Americans are both so hard-hearted and so gullible that up ’til now they’ve donated generously to charities due to the promise of a tax deduction, but will cut those charities off once there is no specific provision for charitible deductions.

Image: https://commons.wikimedia.org/wiki/File%3AHelping_the_homeless.jpg; By Ed Yourdon from New York City, USA (Helping the homeless Uploaded by Gary Dee) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons

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