In a rare bit of bipartisanship, Democrats and Republicans on the House Ways & Means Committee have introduced legislation to allow people who contribute to Haiti relief in 2010 to take a tax deduction against last year’s taxes. Well-intentioned as it may be, the measure is wrong-headed and likely to create more problems than it solves.
The bill, sponsored by both Committee chair Charlie Rangel (D-N.Y.) and ranking Republican Dave Camp (R-MI) would allow those who give this year to take a deduction in the current filing season and not have to wait until April 2011. On its face it sounds good, but….
The proposal won't help the two-thirds of taxpayers who take the standard deduction since it only accelerates itemized deductions. Even among itemizers, those millions of givers who are contributing $10 by text message are not going to care much about whether they can write off those few dollars this year or next.
Those who might benefit—relatively high-earning itemizers who give substantial gifts—can easily address this cash flow problem under current law. All they’d need to do is change their withholding or estimated tax payments to reflect any unusually large gifts to Haiti relief.
There is an even bigger question, however. How much does the after-tax cost of a charitable gift affect contributions? Interestingly enough, the answer it not so clear. You'd expect people to give more when their tax rates rise and less when their rates fall. After all, if you are in the 25 percent bracket, your after-tax cost of a $100 contribution is $75, but if your marginal rate is increased to 30 percent, your after-tax cost is only $70. And people do respond to changes in their rates, but their response does not seem to be very big. Btw, a 2008 paper by Jon Bakija and Bradley Heim finds that higher-income taxpayers are more likely to adjust their giving to reflect changes in their after-tax cost--another reason they'd be the biggest beneficiaries of this bill. But even for them, this small temporary timing change is not likely to matter very much.
Still, some people would change their behavior, and that troubles me. Will they reduce gifts to other worthy causes in favor of newly tax-favored Haiti-related charities? Many organizations are already struggling with major recession-driven reductions in contributions and this would hurt even more.
Why does Congress want to encourage people to give to Haiti as opposed to other equally important causes? I’m not downplaying the Haitian catastrophe in any way. But do Haitians need more help than, say, 2 million displaced Somalis? Is a homeless family in Port au Prince more homeless than a family in Congo, where a civil war has killed five million and left another 2.5 million in camps? And are we sure that Haiti-related charities (among which the bill does not distinguish) are all worthy of this extra tax incentive--modest as it may be.
By all means help Haiti. It needs your assistance. But don’t be surprised if congressional micromanagement of your good intentions turns out to be much less helpful than the bill’s sponsors would like.
