Charitable donations above the line?

H.R. 5771 proposes to make the charitable contribution deduction one for AGI rather than an itemized deduction. This is not a new idea, but one that affects more individuals because the Tax Cuts and Jobs Act changes mean that rather than 30% of individuals itemizing, only about 13% will itemize. Of course, among those itemizers are many big donors.

The Tax Policy Center estimates that the change will reduce donations for 2018 by about 5%. The Joint Committee on Taxation estimates that the "cost" of the charitable contribution deduction for 2018, claimed by about 16.4 million individuals is $41 billion (JCX-34-18, page 49). For 2017, the estimate was 35.8 million individuals claiming it at a cost of $58 billion (JCX-3-17, page 45). Part of the drop in "cost" is due to rate reductions, but most is due to more people claiming the standard deduction. This JCT data is not a good indicator of change in donations because many newly claiming the standard deduction may very likely continue to give as much as they did before.

The "cost" of an above-the-line deduction would be significant as many people donate to charity including those who always itemize. Should the deduction be available to everyone? Would a credit be better? A credit would be worth the same to all taxpayers. A deduction is worth a lot more to those in higher tax brackets. For example, someone donating $1,000 who is in the 37% bracket is only out of pocket $630 after taxes. In contrast someone in the 12% bracket is out of pocket $880.  Or put another way, all taxpayers are providing a greater subsidy to higher bracket donors.

A challenge with the charitable contribution is that the benefit not only goes to the donor, but to the charities they chose to support. Do people at all income levels support the same charities? Probably not (a good area for some study - let me know if you've seen such a study).

What about modifying H.R. 5771 to only allow a deduction to the extent it exceeds 3% (or some other percentage) of your modified AGI where that term is defined as AGI before the donation and with tax-exempt interest and various exclusions such as for foreign-earned income added back?  This won't cost as much (meaning we might not have to have a rate increase to pay for the change) and recognizes that giving some percentage of your before-tax income is expected, but if you give above that amount, you'll get a tax break.

Not perfect because not everyone can estimate their income well enough to know if they should be keeping records of donations because they might exceed the threshold, but certainly not as complex as many other tax rules that exist.

What do you think?

Income inequality, education and taxation

A recent blog post from The Tax Foundation (3/16/12) points out - "Census Data Shows Inequality Linked to Education, Not Taxes."   For years, data has shown that college grads tend to make a lot more annually than do those without a college degree.  But whether that means that taxes are completely innocent for the college versus non-college earnings situation doesn't tie for me. I raise the issue here of whether some of the government spending decisions, including the structure of tax expenditures (special tax rules), supports inequities that may make it more difficult for low-income individuals to get to college and to complete a college degree.

Some examples:

• The American Opportunity Tax Credit provides up to a $2,500 tax credit annually for each of the first four years of college for a student (so $10,000 tuition and expense assistance in total). This special tax rule is not available to all taxpayers because there is a phase-out provision. But that phase-out provision doesn't start to kick in until a fairly high income level - $160,000 for a married couple (no credit available once their income exceeds $180,000).  At this level of income, the couple is unlikely to qualify for a needs based college scholarship for their child.  We often hear that there is insufficient funding for Pell grants. So why are we giving government dollars (that come from all taxpayers) to people who don't really need it? (see my 3/22/11 post)
• Some (including me) would argue that our current charitable contribution rules are too generous.  There are a few examples, I'll share one tied to this education and tax topic.  I often hear from friends that the PTA or Home & School Club at their child's public school tells them they are expected to "donate" a certain amount based on how many kids they have attending the school. Under our existing tax law, this is a deductible charitable contribution.  The money is used for your kid's education. If they were at a private school, the amount would not be deductible. Let's eliminate charitable contribution deductions to schools your child attends.  This would raise more revenue that could be used to help schools where parents can't afford to donate money, for example.
• Another inequity tied to donating money to schools (or anywhere) is that as a deduction, it is an "upside down" subsidy in that it provides a greater benefit/subsidy to higher income individuals. For example, two people donate $2,000 to ABC Elementary School (or any charity). One donor is in a 20% tax bracket and the other in a 35% tax bracket. The 20% bracket donor is out of pocket $1,600 after taxes, but the higher income donor is only out of pocket $1,300. Changing the deduction to a credit would make this more equitable. It could also be cut back to enable federal and state governments to have more revenues to help address inequities in educational opportunities.
• Another area for modifying charitable contribution deductions is to reduce the deduction (or ideally credit percentage - see prior bullet point), is to have categories of donations. Some donations are made to entities with billions of dollars, such as some private college endowments. We are all funding getting more into these rich coffers due to the tax deduction. This could be cut back and revenues used to improve educational opportunities for those in need.

This is just a few examples of how the tax law contribute to enabling or supporting inequities that help continue income inequalities. The examples above tie to education but there are other inequities in the tax law which, if addressed, could generate funds to help reduce educational opportunity inequities that can help reduce growing income inequalities.

What do you think?