Why Limit Charity?

Miranda P. Fleischer, University of Illinois College of Law

Abstract

In the wake of Hurricane Katrina, Congress temporarily lifted one of the most puzzling limits in the tax Code: the cap that prevents an individual from claiming a charitable deduction greater than 50% of her income, even if she gives more than half her income to charity. Although scholars often criticize the cap in passing for creating unnecessary complexity, few have explored its theoretical underpinnings or the broader question of whether an individual who gives all her income to charity should still pay some tax. Those who have appear hard-pressed to find a satisfactory answer to that question.

This Article fills that void by exploring in more depth whether limiting the ability of taxpayers who make substantial charitable contributions to take a charitable deduction is justified. It answers that question in the affirmative, relying on two complementary theories. The first is based on economic theory and the second is rooted in political philosophy. The economic explanation proceeds directly from the literature conceptualizing the charitable deduction as a way of overcoming market and government failure for various public goods by spurring non-profits to produce them. It suggests that limiting the charitable deduction to some portion of one’s income reflects a bargain between individuals whose preferred public goods are fully funded by the government and those whose projects are only partially subsidized. The philosophical explanation is anchored by the idea of reciprocity inherent in liberal democratic theory. It argues that allowing some individuals to pay no taxes, even if supporting a “good” cause, is tantamount to allowing them to opt out of a previously agreed-to scheme of cooperation and undermines the stability of our democratic society.