Centerfield

Great link Tully.

Hope to read this beast when I get around to it.

While we're on tax policy, no one brought up the subject of the recent tax review panel's recommendations for changes to the tax code. Leaving aside the obvious problem that many of the changes are political suicide, I thought some of the ideas were good ones. Anyone else?

For example, a ceiling on mortgage interest deductions, maybe based on local property values sounded like a decent idea to me. And questioning the propriety of allowing the interest deduction on home equity loans sounds sensible to me as well. I know for a fact that this is being used as a loophole, as one of my more well-off friends mentioned that his well-off neighbors were counseling him to get in on the sweet deal.

Briefly, it works like this: you take a loan or line of credit using the equity in your home as the backing, and you can spend the money however you want. So, for example, buy a new car with a dealer loan or credit union loan, and the interest is not tax deductible. Buy the same car with a home equity loan/line of credit, and voila, the interest is tax deductible. Same purchase, different financing vehicle, preferential tax treatment.

Bring up that home-interest ceiling without the regional adjustments, and listen to big-city blue-staters scream! Bring it up with the regional adjustments and listen to lower-income red-staters get nasty about "inequitable treatment." Yet it's an effective method of progressive taxation, raising taxes without actually raising rates, and the current form provides hefty tax subsidies for "the rich" that the poor have trouble accessing.

Same with the charitable exemption. Check out Figure 5 on page 8. Eliminating or limiting the charitable deduction would have little effect on lower-income taxpayers, but a major effect on higher-income households. If you remember last year's debates on the estate tax, you'll recall I proposed a simple three-part reform to restore equity to the ET system and make it both fair and progressive, which it isn't. Raise the kick-in, lower the rate, and eliminate the charitable exemption.

Which is why it's important to first examine how those tax-exempt "charitable" contributions are used, and the nature and structure of the 501(c)3s that get the loot.

There's a very relevant argument to be made against regional adjustments but I'm a little time-pressured this morning. The essence of it would be that the lower-cost areas have been doing something right or they wouldn't be lower-cost in the first place. And there's a counter-argument to those that would dispute that, as well.

What about limiting the mortgage interest deduction to some percentage of one's income? That percentage could itself be progressive. Any thoughts?

Jeezum crow YES! You can't think about regional adjustments to taxes based on any rough measure of cost of living before you realize that it would open a HUGE, HUGE can of worms. A pandora's box even.

IMO it would be harder to get a meaningful ceiling passed without such adjustments. We'd just end up with a ceiling so high that the change in revenue collected would be a pittance. (Or one that would be a numerical cap that would over time grow into problem as troublesome as the AMT: i think you have to index such caps to something)But once you did it in one place, people would start wanting to look at the method for tax brackets. So I don't think it will happen at all.

But it does seem a shame that a deduction useful to encourage home ownership at the threshold has become a vehicle for tax avoidance among the wealthiest.

I think there would be some political and even revenue value in putting a cap on mortgage deductions on mortgages greater than, say, $5 million. In any area of the country, $5 million buys a lot of house. More in Baton Rouge than in San Francisco (a LOT more, you people should move here), but still enough to be considered "rich". And the uber-wealthy who use the deduction on their $10 and $20 million mansions as a tax shield would be hit, which is always good tax symbolism. Of course, I have no idea how many > $5 million homes there are out there.

Regional indexing is an interesting concept. We are all familiar with such indexing with travel reimbursement guidelines and the like already, so it's not an alien concept. I wonder what the unintended consequences of that might be. It could help encourage migration into cheaper states, like my own. We could use it...

I like the idea of cutting the home equity loan out of the equation, but I'm not sure it's workable to exclude it. If I take a second mortgage, will I have to prove that I used it for home improvements or additions rather than a new car? If I refinance because of lower interest rates, and take some equity out when I do it, can I still deduct all the interest? And is this that different from a scenario where I have $50,000 available for a downpayment, but only put down $25,000, so that I can spent the other $25,000 on the new car? Hard to police the exclusion on the deduction.

WHQ, that sounds a bit like the AMT in principle to me. Index it appropriately, and it might work.

On the larger issue, tax reform is going to have to be passed in toto, accepting the fact that it's not perfect, just as our current system is not perfect. The special interest group critics will assail each provision by comparing it to the perfect and the abstract. Those in favor of fundamental reform need to focus on the concept that the reform is simply better than what we have now, the perfect not being possible.

And on Tully's original topic, I don't agree with the paper's original premise, that the definition of charities should be limited to those providing "public goods" (as defined economically). By that definition, "Meals on Wheels" and local food banks would not be considered charitable. I agree that some types of programs and organizations on the list stretch the bounds; PBS comes to mind as something that is paid for by viewers who simply don't want to see advertising during their shows. But I see a big difference between the YMCA and for-profit private gyms. And the fact that an art museum has gift shops does not mean that it is just the same as a private business.

The article makes a good point that many charities rely on government support. I'm on the board of one or two which provide contract services (working with juvenile delinquents, for example) to state government here. There's a BIG difference between the motives of that operation and the motives of a for-profit corporation. Not having stockholders expecting a return on investment changes the picture entirely. To the extent that it objects to political activism and lobbying, I agree there's no need to subsidize that with tax deductions. But there's a lot more going on with these charities than that.

Finally, while the paper addresses only the charitable deduction, its arguments would support doing away with the income tax exemption on such entities as well. Isn't being exempt from income tax a public subsidy as well? How many fewer people would Catholic Charities be able to help if it had to pay a big chunk of its income to the federal government?

Got around to it. I thought it was at its weakest when dismissing education and healthcare because they weren't public goods. Seems to me that health and public education guarantees serve to make it arguable that resource is really not substantially diminished by adding consumers. Generally, there's a guarantee of healthcare or an education, and you still get that. There MAY be a quality diminishment, but not necessarily. And even if they don't quite meet the tech econ def'n, there's still something of a free rider problem leading to market failure, at least in healthcare.

But I think I could support curtailing the deductions so they applied only to genuine services that meet the layman definition of public good, especially the more essential ones: food, health, shelter,education.

I love art. And I'm not convinced that art would actually suffer if subsidies were decreased. It's an open question as to what motivations lead to great art.

And as far as think tanks etc, I think it might be interesting to drop the deductions for financing such stuff. I wouldn't lose any sleep over it. Of course, there's a question for centrists as to what this would foster politically. If you buy the notion that the most zealous and passionate are the most likely to contribute regardless of tax benefit, it's possible that tax changes might foster wingnuttery.

What I think of as the main point of the paper is one that i can buy into: we can assume that some substantial portion of charitable deductions are driven by tax avoidance, not passion or philosophy. So let's target the deduction eligibility to those areas which most of us would view as uncontroversial public goods in the layman sense: health, education, scientific research, services to the genuinely needy. I'm down with that.

Point to note: Current tax law limits the home interest deduction to interest on the first $1 million in mortgages plus interest on $100K in home equity loans.

Other point to note: The Tax Foundation paper doesn't argue for taking away the non-profit (tax-free) status of 501(c)3s, but for limiting the deductability of donations to them.

Ironic note: The Tax Foundation is a 501(c)3.

A million seems a little high to me, but if it's not indexed, it's a time bomb. A million probably seems REALLY high to people in other parts of the country, especially the midwest and many parts of the south.

In the near suburbs of Boston, you may pay upwards of 500 or 600k for a 1950's or 1960's built 3 BR ranch on a quarter acre lot. FWIW, that's one reason why I'm in the FAR suburbs, and even my house has more than doubled in value in 6 years, increasing by 120-140%.

Tully, IMO the paper argues not for limiting deductabilty, but rather it argues that the vast majority of such deductions lack economic merit, IOW, it implies we should practically do away with them, though it leaves open the notion that they could be kept if other meritorious reasons could be mustered.

What's your view on which areas deserve to continue to enjoy the benefits of collecting contribtions that contributors may deduct?

IMO the paper argues not for limiting deductabilty, but rather it argues that the vast majority of such deductions lack economic merit, IOW, it implies we should practically do away with them, though it leaves open the notion that they could be kept if other meritorious reasons could be mustered.

The paper explores "what is the economic justification for subsidizing charities to begin with? And is the current charitable deduction consistent with that justification?"

But the real issue they're explicitly addressing is: "that the size and scope of the current charitable deduction cannot be economically justified, and should be dramatically reduced—not expanded—as part of any fundamental tax reform.

You have to explore the first to (reasonably) consider the second. I didn't see any argument for doing away entirely with the tax-free status of non-profits, although exploring that first could lead you that direction in some cases. The key would be the provision of community services, methinks. Meals on Wheels would be safe, but the Ruckus Society would be under the gun. I'm on the boards of three non-profits right now, Pat, and on federal grants review committee for funding that goes to many other community non-profits. I don't see that they'd have anything to worry about--other than they would need to keep their lobbying to their core "public goods and community service" missions.

What's your view on which areas deserve to continue to enjoy the benefits of collecting contributions that contributors may deduct?

How about the easier list, those that shouldn't be deductible? For some quick and easy examples, go over to our left sidebar, down to "Resources," and check out those thinktanks and foundations and institutes on the list. I didn't check every single one, but the bulk of 'em at least are 501(c)3's. Why should we run larger deficits so that the rich and connected can enjoy tax-deductible schmoozing in Aspen with the Dalai Lama? Why do we need to subsidize the wealthy in promoting their political agendas through the Heritage Foundation or the Institute for Policy Studies?

Just as with the estate tax, the very wealthy have no problem at all in avoiding taxes and promoting their agendas. The charitable deduction plays a major part in that. The article doesn't give us enough detail to figure out how much of a fiscal impact dsiallowing various areas would have. But note the "private foundation" segment. A HUGE number of those are one-family "foundations" that exist solely to provide the donor's families with tax-free pass-throughs to evade the income and estate taxes. Often the salaried officers are the donor's children, with "free" jobs for life at high pay. Why do we subsidize that?

Tully, in case i was unclear, I basically agree. When I said "practically do away with" I was thinking of that as synonymous with their own "dramatically reduce."

I think it makes really good sense to hone the scope of allowable deductions to get rid of ones which are not the sort of layman's "public goods' that you can't get 2/3 to 3/4 of the people to agree on, things like meals on wheels, etc.

Tully, based on the Special Report, why would Meals on Wheels be considered safe? They do note that they only explore the "economic justification" for charitable deductions, but in doing so they really don't even acknowledge that many traditional charities (including Meals on Wheels) are not considered as charitable under their economic definition. The paper does not give us a good way to distinguish between charities which feed and educate the poor and charities like CREA. Under the paper's definition, neither are charities.

The definition of charity in the paper are things like public artwork displays, firework displays, and other items where "one person's use doesn't reduce the amount left for others" and "people who don't pay can't be prevented from using the good". Providing food or educational services fail one or the other of those clauses. It explicitly lumps together all of "health and education" (meaning hospitals and universities), and uses their huge percentage of total charitable receipts as evidence that "the vast majority" of charities do not produce exclusively public goods. In a side-bar, it notes that universities and hopistals do not qualify as providing public goods, "making it hard to justify a tax subsidy for them on economic grounds alone."

Certainly there are both hospitals and universities which look a lot more like for-profit organizations than non-profit ones. But there are still plenty which provide a whole lot of truly charitable services (using a more real definition of charitable than the paper does). Feeding poor people and their children is in fact a public good, in my book. Educating the ignorant is also a public good. But this paper lumps those charities in with the rich men's trusts you describe.

So you identify a real problem, but The Tax Foundation's paper offers little help in either quantifying that problem or helping us distinguish between what most would consider real charities (Meals on Wheels) and tax shelter charities or not-really-disguised political activism charities like your Ruckus example.

P.S. I know that the paper only argues for getting rid of tax deductibility of contributions. My point earlier was that the same argument could be used with equal force to justify eliminating all tax exemptions enjoyed by the "bad" 501(c)(3)s it targets. And as I read it, it sure felt like the Foundation was laying the groundwork for that next step.

The practical: If they went that step, they'd lose all their support. And frankly, their "charities as providers of public goods" argument in that brief paper is easily refuted and disputed, as you noticed. I offered it mostly for the exposition on political "charities" that are sweeping in huge sums, at huge cost to taxpayers.

Meals on Wheels easily qualifies under the "material community service" guidelines we use for community service grant assessment, as do hospitals. Museums would have it tougher, but the case can be made. The Ruckus Society doesn't come close--their only "product" is political activists.

We can easily make the case for actual community-service charities, and I believe we can set clear guidelines to exclude the "private" family foundations and thinktanks and political orgs while not choking out legitimate research foundations in, say, the medical field. I think it's a good issue for centrists. Both wings will hate it, but the arguments for concentrating deductible charitable funding on actual community-service charities resonate across the board with anyone BUT the activists and moneybags of the wings who are diddling the system.

Knocking the partisan orgs and lobbies and private tax-dodge foundations out of the tax-deductible mix would concentrate deducted giving on the community-service orgs. Side benefit, but a big one.

Add-on: I don't have much problem with many of those thinktanks and such keeping non-profit tax status, it's the donation deduction that really annoys me, by providing effective taxpayer-subsidized funding for the wealthy and for political groups.

That paper seems like a classic example of Ivory Tower theorizing that's completely out of touch with the real world.

I suppose it's mildly interesting to analyze the economic justification for/against the charitable deduction -- but completely besides the point. The point of the charitable deduction is to SUPPORT CHARITY, not to maximize economic efficiency.

I'm with you on all that, Tully. The only caveat being about the think tanks. (Disclaimer: I worked for the Heritage Foundation as a secretary for 11 months after college and before law school.) There's certainly abuses there (I remember the analysts who did all the intellectual work mostly got paid squat while the founder and senior VPs sucked up very high salaries, and I'm sure it's the same elsewhere), but the serious think tanks (Heritage, Brookings, a very few others) have produced very good, thoughtful work, which adds to serious policy discourse on both (all) sides. I also think there is a fair amount of benefit in providing former appointed officials with a place to sit out political swings and the other party's administrations. I know Heritage provided a paycheck to Jack Kemp and Ed Meese after they left office, and I assume Brookings provided a similar safe haven on the left. Better working for a non-profit devoted to policy analysis than going straight to the for-profit sector, which would be seen as profiteering on one's government service and present conflict-of-interest problems upon return to government.

But you're right, most of the think tanks are just political shills, ripe for abuses of all types, and undeserving of charitable deductions.

One big point is that arguably it's far more charitable an act to donate when you DON'T expect a tax deduction.

I'm with Tully here on limiting the deduction to charties providing material goods and services. I'd be VERY willing to see how think tanks and the like fared without the tax deduction. Seems to me thare are enough passionate partisans to fund such stuff even in the absence of tax benefits. Consider this, my fellow wonks...since thinking about politics is something we seem to enjoy, one could reasonably describe this as a hobby. Contibuting to political causes is a way to indulge that hobby. Should we subsidize only some hobbies?

And I'm with Tully on the many private foundations that make a mockery of true charity. Some of these might be able to make an argument on the provision of material goods and services, so it might also be nice if contributions qualified for deductions on the basis of a given donee's efficiency. Donate to a charity that spends 70% on goods and services, you get a deduction. But if the charity spends 70% on overhead, no deduction for you.

Brian, that's a nice thought and could bear some fleshing out. Devil's in the details, though. For small charities, you don't want to impose overly burdensome Sarbanes-Oxley-type accounting and reporting standards that small but real charities could not afford to meet. And it could be a little tricky differentiating employees who count as service spending from employees who counts as overhead spending. Maybe you could have different rules kick in depending on the total amount of contributions or something like that.

Right, of course there'd be many details to flesh out, and the policy would need to be flexible on various counts, but it'd be worth it and probably curb a substantial portion of the abuse even if it worked imperfectly.

From what I've read, the lack of oversight is a big problem. No one is going to get on board with any sort of oversight which equates to "more IRS agents on people asses" unless the tax system is at least made more comprehensible.

My take on such things is that if a high level of oversight is not that practical, why not try some seriously draconian punishment that is aptly publicized.

Rasie the charitable foundation standards, don't add too much enforcement, but give a few agents the power to make finding a few rulebreakers a top priority, and then crucify people caught using such foundations as tax dodge without doing any good. And have a TV show, this week oncrucify a greedy pr!ck we'll be looking at the...