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Why Not Create a Tax Credit for Charitable Giving?

Posted on the 18 September 2014 by Smallivy

cliffCertainly there are people who legitimately need charity.  There are people like craftsmen who are injured in ways such as the loss of limbs that prevents them from earning a living.  There are also people who work hard but don’t have the training and the skills needed to get a job that pays enough to provide for a family (although this should be a temporary situation).  There are people who are born mentally handicapped who cannot do more than very limited tasks.  Finally, bad things happen to everyone, and sometimes people need help to recover from a house fire, a family illness, or a sudden loss of a job.

Unfortunately, private charity has not been enough to meet all of the needs in the past.  Before women were able to work many regular jobs in America (back in the 1800’s), the loss of a husband due to a death or simple abandonment might leave a woman and her children destitute.  There are still many countries in the world where this is the case.  Even today, an individual with young children and a limited education who does not have a support structure such as an non-working parent nearby may not be able to make enough working to pay for care for her children during the day.  While many people give money and goods to charities that help such people, the need has always been more than the money donated.

Starting with the Great Society and the War on Poverty in the 1960’s, or perhaps before this with the New Deal, the government expanded its role into providing welfare.  Through programs like food stamps and Medicaid, many poor people have been given access to vital necessities such as food and medicine.  These programs have come at a great cost, however, both to the taxpayers who pay for the programs and those who utilize them.  There is a huge administrative burden for those programs with a huge number of people involved in the accounting, planning, distribution, and verification functions.  There is a large amount of fraud and abuse of the programs, probably doubling the cost.  There is also a great incentive for people to stay on the programs rather than do what is needed to become self-sufficient and eventually flourish financially.  This is probably the biggest cost of the program in that society misses out on the contributions of many individuals and those individuals don’t live up to their potential, never having the experience of doing anything for anyone else.

While certainly there are many well-meaning people involved in the process, the issues are:

1.  There is no incentive to improve the process because doing so doesn’t result in any gain for those administering the program and there is usually a strong pushback against change.  Also, it is unlikely that any person would have the authority to make the changes.

2.  Central management is unable to address the individual needs of the many small communities across the nation.

3.  Frontline administrators find it easier to just issue a check than try to diligently work to prevent fraud, even when they suspect it is occurring.  Actions implemented at the top to prevent fraud make it very difficult for legitimate individuals to receive the needed aid while those who commit fraud find ways to work the system.

4.  There is little incentive to get people off of perpetual welfare because doing so would eliminate the jobs of those who administer the programs and having people beholden to those programs helps politicians get reelected.

5.  For the individual, there is a large gap between welfare and work where it would require a large cut in standard of living for a period of time in order to go from dependence to independence.   There is also little encouragement to do so from others in the community.  Note that the thought that they are taking money illegitimately from other people doesn’t enter into their financial calculations.

6.  Long-term welfare leads to feelings of hopelessness and worthlessness.  This is compounded by charlatans who stir up race or class envy, saying that a group’s situation is the result of outside prejudices or constraints rather than of one’s own making.  This feeling of helplessness is passed on to future generations.

7.  Having abundant amounts of time due to not needing to work to provide for basic needs leads to dangerous behaviors such as drug addiction, making it more difficult to be self-supporting, or promiscuity, leading to children being born into households that can’t support them.

8.  The fundamental basis of government welfare is stealing.  Individuals are forced to give up their wealth to support others.  Those who refuse are met with force and perhaps imprisonment.  This is really no different from individuals going from home to home and taking things.

I would like to propose a way to replace the government system with one where money is collected privately.  Unlike the past, where the level of donations was insufficient to meet needs, there will be more than enough private money to meet the needs of those who truly need help.  There will also be incentives for people to support themselves up to the level of their ability.  The idea is as follows:

We change tax laws such that all donations up to 10% of your paycheck given to a charity that does things like provide food to poor children and subsidize rents for low-income workers is a tax credit, meaning that it reduces your taxes dollar-for-dollar.   If you tax bill is $10,000 and you give $5000 to charity, you would only owe $5000 in taxes.

What would be the effects of this idea?

1.  A lot of people would give the full 10%, figuring that their money was going to be taken for taxes if they didn’t make a donation anyway, so they might as well contribute and have a say in who gets the money.  If most people were giving 10% of their income to charities, there would be plenty of money available to take care of those who were mentally or physically handicapped, were in situations such as having children at a very early age, or had other legitimate reasons for not being able to earn enough to take care of their own needs.

2.  Because people were giving their money directly and there were different charities competing for the money, like any other free enterprise business people would give more to the charities that did a better job.  Those that provided services that had an effect – they really helped people – would see their donation levels rise.  Those that had a lot of fraud or waste, such that people saw their money being wasted, would see their donations drop and perhaps go out of business entirely.

3.  Charity would become local, with local people dispensing the charity with knowledge of the needs of the community, the situations of the people they were helping, and which individuals are abusing the system.

4.  Tax collections would drop since money would be diverted to charities, but the need for government support would also drop.  In fact, because local charities would be more efficient, the amount of money that would need to be collected to provide the needed support would decrease, leaving more money in people’s pockets.

5.  If charities became over flush with cash, such that they started to be wasteful or allow large amounts of fraud, people would start to choose to have more taxes collected, thereby increasing services or expanding other government functions such as defense and roads, instead of giving as much to charities.  They might also choose to have both the tax rates and the maximum tax credit reduced so they would just keep more of the money they earned.

So that’s the first SmallIvy Big Idea.  Look for others to come.

Follow on Twitter to get news about new articles. @SmallIvy_SI. Email me at [email protected] or leave a comment.

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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