Generous to a Fault? Fair Shares and Charitable Giving

Miranda P. Fleischer — Mon, 18 Feb 2008 13:26:00 PST

Given the vital role that charities play in our society, it is not surprising that the tax Code encourages philanthropy by allowing a deduction for charitable gifts. What is surprising is that it treats the most generous among us less favorably than those of average generosity. This stems from one of the most puzzling limits in the Code: the cap preventing someone from claiming a charitable deduction greater than 50% of her income, even if she gives more than half her income to charity. As a result, someone generous enough to donate all her income must still pay income tax. Few scholars have explored this rule’s theoretical underpinnings or the broader question whether an individual who gives all her income to charity should still pay tax. Those who have seem hard-pressed to satisfactorily answer that question. This Article begins to do so, relying on the literature conceptualizing the deduction as a way of overcoming market and government failure for various public goods by spurring non-profits to produce them. It argues that precluding taxpayers from zeroing out their tax liability via charitable gifts reflects a bargain between individuals whose preferred public goods are fully funded by the government and those whose projects are only partially subsidized, and that this bargain is necessary to reconcile the private provision of public goods via charitable giving with our democratic legislative process.

Why Limit Charity?

Miranda P. Fleischer — Thu, 02 Aug 2007 10:35:56 PDT

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.