Charity

Matt Yglesias questions the effectiveness of charitable donations to wealthy universities and arts and cultural institutions, and wonders if we need to restrict the tax exemption:

To me, to figure this out we’d need to have some serious estimates about the impact of restricting charitable deductions. How much new tax revenue are we talking about? If we kept the deduction in place for institutions aimed at helping the poor, how much charity would be redirected in their direction? But how difficult would it be to administer a rule like that? How much would giving to cultural institutions decline? It’s a lot of thorny policy questions.

Now, maybe I’m biased because I’ve worked in the nonprofit sector, but I think he’s barking up the wrong tree. The three biggest tax deductions, by far, are the charitable deduction he mentions, the home mortgage deduction, and the state and local income tax deduction.

If I were thinking about tax reform, I’d focus on the latter two. Getting rid of the home mortgage deduction would have probably prevented the recent housing bubble, by making people consider slightly smaller and more affordable houses. Plus, the home mortgage deduction is highly regressive (really rich people get an insane deduction). The government over-incentivizes home ownership, IMO, and thus causes runaway growth in housing prices.

Finally, the state and local income tax deduction is silly. It’s like borrowing from Peter to pay Paul. Especially in a state Washington, with no income tax, where they make you estimate how much sales tax you paid in the last year and try to deduct that. It’s grossly inefficient.

Of course, getting rid of either of these would be damn near impossible, politically speaking.

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