A call to limit the charitable deduction may sound heartless—what about all those churches and museums and schools and nonprofits?—but the deduction actually benefits the rich, while "the rest of the country has to make up the gap," writes Fred Hiatt in the Washington Post. A few examples:
- If you're in the highest tax bracket, a $10 million donation will lower your federal taxes by $3.5 million. But if you're in a lower tax bracket, your deduction will also be worth less: For someone paying at a 15% rate, that same $10 million would only lower federal taxes by $1.5 million.
- Seventy percent of Americans don't itemize, so they get no benefits from their charitable donations. One study finds taxpayers reporting income of less than $50,000 accounted for 19% of donations—but got just 5% of the tax subsidy.
- Plus, donations can help the very rich avoid capital gains tax, if they are made with stock that has increased in value.
"Essentially, average Americans are helping to pay for our billionaire’s generosity, though of course they have no say in where his charity goes," Hiatt writes. Any attempt to limit the charitable deduction is met with howls of protest, but we all must remember that "there are few easy targets in the tax code." Do we really want to kill the American dream by killing the mortgage interest deduction, or harm education by limiting the state and local tax deduction? But if we're serious about eliminating loopholes, we're going to have to make some distasteful choices. Click for Hiatt's full column.