Sunday, December 19, 2010

The Charitable Deduction

Richard Thaler takes on the tax deduction for charitable giving.  He suggests that there is little reason for it and that a refundable tax credit would be more justified.

I think there is a bit more logic to current policy than Thaler does.  Suppose you believe, as I do, that consumption is a better tax base than is income.  Then, starting with a measurement of income, it makes sense to allow deductions for "non-consumed income"--specifically, saving such as IRA and 401k contributions and charitable giving.

Some may argue that giving to charity is itself a form of consumption.  After all, the person who gives is doing so voluntarily, so there must be some utility to the giver.  Perhaps, but there seems something fundmentally different about consumption in the form of charitable giving and consumption in the form of large homes and fast cars.  But maybe that is the puritan, rather than the economist, inside me speaking.