Fallacies in Fred's Argument

 

Fred Hiatt says the federal income tax charitable deduction is unfair because it means more to a rich person than it does to a middle class one. Then he makes his points -- many of which are flawed.

 

I'm not going to debate the wisdom of keeping the deduction. I'm of the opinion that the best way to reform the tax code is to institute a flat tax of 10% on all income -- no deductions. That way, everyone foots the bill on an equal basis. If you don't make much, you don't pay much. If you make a lot, you pay a lot.

 

At any rate, Fred says that the deduction "lets people feel they are beating the system even as they practice virtue." Wow! Fred sure has a high opinion of people, doesn't he? Mr. Essie May and I itemize our charitable contributions, but taxes are not the reason we give. We'll give the same whether we get a deduction or not. And we pay so much in taxes I've never felt we've been able to "beat the system."

 

Fred says the deduction overwhelmingly benefits the wealthy and the rest of the country has to make up the gap. Has Fred considered that the charitable contributions those people are making may be keeping some people off the government dole and saving the government money? Maybe those "wealthy" people are really closing a gap there. Fred is assuming that the increase in taxes the "wealthy" would pay without the deduction has to be made up by someone else. Not really, Fred. The government could cut some waste. See my recent post on Homeland Security expenditures.

 

Fred uses an example. He says a California billionaire gives $10 million to a Los Angeles hospital. If he takes that deduction, he will pay $3.5 million less than he would have had to pay otherwise. So let's look at this. If the billionaire had not made the donation, the hospital would not be able to offer the additional services it now offers because of its expansion. The billionaire would have to pay $3.5 million in taxes, but he'd still have $6.5 million in his pocket. Making the donation, even with his tax deduction, he has $6.5 million less in his pocket. How does that profit the billionaire?

 

Then Fred expands his example. He posits that the billionaire made his donation with stock for which he paid $5 million and that has increased to $10 million in worth. He said he avoids paying any capital gains tax which he would have had to pay had he sold the stock and put the money in his bank account. But he didn't sell the stock, so he had no proceeds. You make money on a stock only when you sell it.

 

Then Fred says that if someone in a lower tax bracket than Fred made the donation, he wouldn't get to take the full value of the deduction, because his tax rate is lower, and that's unfair to him. In the first place, someone in a lower tax bracket probably couldn't afford to give $10 million away. But, for the sake of argument, let's examine Fred's contention. Let's say Fred's billionaire made $500 million dollars in the year he made his $10 million donation, and he's in the 35% bracket. So he pays 35% on $490 million or $171,500,000. Fred uses the example of someone at a 15% rate, so let's follow that logic. If your rate is 15% and you made $500 million dollars and made your $10 million donation, then you paid $73,500,000. Sounds like the 15 per-center is better off to me.

 

So Fred sums up his garbage by stating that we need to decide how much we want to "pay to help renovate that hospital wing with the billionaire's name above the door." As far as I can tell, Fred, it hasn't cost me a cent.

 

"Charitable deduction a question of fairness." The Dallas Morning News; December 4, 2012; p. 13a.