You shouldn’t have to pay income taxes on money you give away. That is the simple idea behind the deduction for donations to charity. You can see it as a policy to encourage private giving. Or you can see it as matter of “horizontal equity”: A taxpayer who makes $50,000 and gives away $10,000 should be taxed like someone who makes $40,000 not like someone who makes $50,000 and keeps it all.
No matter how you see it, though, there’s no good reason to let people deduct money they never have to declare as income. Yet that’s the rule for “appreciated property.” John McCain includes this item in a long list of tax loopholes he would close. George W. is attacking him for it. Meanwhile, President Clinton, in his final budget, actually calls for enlarging this loophole by weakening rules that (slightly) limit its use.
Press reports almost never explain how this thing works. It’s not all that complicated. Suppose you buy some stock for $2,000, it goes up to $10,000, you sell it, and you give the money to charity. You declare your $8,000 profit as income, and you deduct your $10,000 donation. That makes sense. Now, suppose instead that you give that stock worth $10,000 directly to the charity. You don’t have to declare the $8,000 profit as income, but you get the full $10,000 deduction anyway. That makes no sense. Is there any reason the government should care whether you give a charity $10,000 of stock or $10,000 cash—care enough to reduce your tax bill by two or three thousand dollars for choosing to give the stock? None that I have ever heard.
No one ever proposed this ridiculous arrangement. It’s the kind of anomaly that gets into the tax code unintentionally and then can’t be gotten rid of. This particular loophole’s protectors include not just the usual rich businessmen and indiscriminate right-wing taxophobes but also every church, university, art museum, and other nonprofit institution in the country. However high-minded or outright liberal they may be on other issues, they abandon their values and their intellectual integrity on this one.
Essentially, this loophole allows people to deduct some of their charity twice. That does, I suppose, encourage donations to charity. But how much encouragement does a person need? If he gives cash, a top-bracket taxpayer can supply $10,000 to charity at an out-of-pocket cost of about $6,100. If he gives appreciated stock, his out-of-pocket cost for giving $10,000 can be as little as $4,100. The rest doesn’t come from thin air—it comes from lost revenue to the Treasury.
And no—to squash a tedious point often made about any discussion of tax loopholes—I am not “assuming that all income belongs to the government.” I am assuming that people who give appreciated stock to charity can do math. And I am assuming that every dollar the Treasury doesn’t get because of a loophole either adds to the national debt or must be made up by taxes on the rest of us.
This calculation does assume that your stock profit will eventually be taxed, one way or another—which it won’t be if you hold on to the stock until you die. Your heirs, when they sell, only have to pay taxes on the profit since they inherited. That’s another, much bigger, loophole that should also be closed. But, meanwhile, allowing the existence of one tax loophole to justify another is like allowing a couple of thieves to supply each other an alibi.
“Loophole” is a charged word, of course. Some of the tax code’s frills and furbelows are justifiable. But they should be justified in terms of their real cost. And kicking in as much as 60 percent in order to encourage someone to fork out the other 40 percent to a charity of her choice (where she gets the thank you and the emotional fix and the tote bag or her name on the building or whatever) seems a bit much. The Congressional Budget Office figures this one will cost $17 billion over the next 10 years. Seventeen billion may be a sad little number to be brandishing in any discussion of government budgets. But I dare Gov. Bush or President Clinton to say that.