Limiting Generosity

It would seem no one would discourage generous giving, and that we would certainly not favor less giving as opposed to more. In a taxed society, we assume that the degree to which an individual is generous warrants an equal measure of tax benefit. Unfortunately, as Miranda Fleischer points out in Generous to a Fault? Fair Shares and Charitable Giving, our American tax system does not encourage unbridled generosity and seemingly prefers to favor those who limit their giving.

Fleischer’s writes:

What is surprising is that it treats the most generous among us less favorably than those of average generosity. This mismatch stems from one of the most puzzling limits in the Code: the cap preventing an individual from claiming a charitable deduction greater than 50% of her income, even if she gives more than half her income to charity. As a result, someone who is generous enough to donate all her income to charity must still pay income tax.

Fleischer’s tracks cover an idea that some of us have never considered- by nature of the charitable deduction, the federal government subsidizes churches, Christian ministries, etc. – another post for another day.

Fleischer affirms the limits to the charitable deduction as the IRS might prefer her to. By distinguishing between two types of public goods, majority and minority, we understand the logic behind her conclusion despite its unfortunate impact on generosity. The majority goods (lighthouses, roads and bridges) are those that all of us (the majority of voters) can appreciate and, therefore, should share responsibility for. The minority goods (in the interest of smaller groups of voters) would be those goods that we do not all share mutual appreciation for and, therefore, should not be asked to support (i.e. Catholic Charities vs. Planned Parenthood).

Admittedly, the IRS is not discouraging anyone from being generous. And, if a person wishes to give every dime they earn to a charity of their choosing, they are certainly welcome to do so.  What the IRS does is limit the benefit of such generosity and, therefore, create a barrier to gifts that might otherwise exceed 50% of a person’s income.