Sunday, March 1, 2009

Taxing The Poor To Help The Government

Surely you must be confused, dear blogger? The proper mantra is "taxing the rich to help the poor" or for the more romantically inclined it's "robbing from the rich to give to the poor" a la Robin Hood. No one in a democracy supports taxing the poor to help the Government, do they?

That's what the proposed Federal budget for 2010 seems to do in part. The Obama plan would reduce the benefit for charitable giving and mortgages for those making $250,000 or more from 35% to 28%.

A-ha! You see? That's taxing the rich, not the poor -- silly blogger!

But wait -- reducing the benefit for mortgage interest might put more tax dollars in the Fed's pocket because mortgages are incurred debts that have to be paid every month. Tax deductions for mortgage interest are designed to promote home ownership, and rich people already bought their properties. So far, that makes sense.

But charitable giving is not mandatory; if the benefit for charitable giving goes down (which has the same effect as taxing the activity), then the amount of that activity will go down. Period.

That's how tax breaks and taxes work: one is an incentive, the other is a dis-incentive. The ultimate "consumer" of charitable giving is the poor. Therefore, if the amount of charitable giving goes down, it hurts the poor -- and effectively this is a tax on the poor.

Rich people are in best position to help the poor simply because they have the most money. If the benefit is reduced for the rich, they will either keep more of the money in their own pocket or their ability to give will simply be diminished.

So how does this help the Fed? In two ways: first, if the benefit of charitable deductions is reduced, then the individual has a higher taxable income resulting in more taxes paid directly to the Federal government; second, if the overall charitable giving is reduced, and more tax dollars are going to the Government, then it is the Government who assumes the primary role of assisting the poor as the "source of beneficence" (already true to a large extent).

If your philosophy is that people should depend on big government to provide those needs, then this scheme allows you to control the money, the ways and means of distribution, and ultimately to shape or re-shape society to your own ideology.

But as Marc Ambinder of the Atlantic put it, "If wealthy people want to give money, then they should give, regardless of tax benefits." Suggesting that the wealthy should not use charities as a tax dodge, he added, "If tax reform down the line were to gut all deductions, would charitable contributions totally dry up?"
Ambinder and company have put up a straw man's argument. They argue that all charitable giving should be completely altruistic, which is unrealistic. Most people have mixed motives when giving, especially as the dollar amount climbs into the statistically significant category.

Yes, some people will continue to give regardless of personal benefit, but it sure makes it easier for the rest of us knowing you can deduct it on your taxes. (The Diocese of Arlington can rest easy knowing I already sent in my Bishop's Lenten Appeal contributions.)

The bottom line is: you use tax policy to get the society you want. If charitable giving is disincentivized by the Fed, then individuals will not be the source of giving to the poor -- your poor Uncle Sam will be.

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