What if you knew that your taxes were going up — but you also had the option of devoting an equivalent amount of your income to nonprofit organizations that have proven successful at fighting poverty at home and abroad, promoting scientific research, caring for the elderly, or achieving some other significant public purpose? This is the thought experiment behind a recent post by University of Michigan economist Miles Kimball:
My proposal is to raise marginal tax rates above about $75,000 per person—or $150,000 per couple—by 10% (a dime on every extra dollar), but offer a 100% tax credit for public contributions up to the entire amount of the tax surcharge.
Kimball proposes two basic tests for what counts as a public contribution: a substitute-for-government-spending test and a legitimate-activity-of-government test, which he explains as follows:
The substitute-for-government-spending test in the proposed law is not meant to prevent the total amount of public contributions for some things from going above what the government would do under the current system. Its purpose is simply to make it possible for the government to cut back on some types of spending to an important degree. Although religious congregations would not be directly eligible for public contributions because of the legitimate-activity-of-government test, many already have associated nonprofit organizations that could be eligible. And a large fraction of religious donations are from people who earn less than $75,000 per year. Support of arts enjoyed mainly by the rich, such as opera, might not meet the high-priority test, although the fine arts would still be eligible for the usual deduction for charitable donations. Setting the public contribution goal at 10% of annual income above $75,000 per person should be enough to ensure that nonprofit activities eligible for the public contribution credit are much better funded despite any crowding out or relabeling of existing contributions. There would probably be some reduction in funding for activities not considered important enough to qualify as public contributions—which would occasion much debate about exactly where to set the boundary between “public contributions” and regular charitable contributions—but setting priorities is not a bad thing.
And Kimball suggests that many taxpayers will come to embrace this proposal. Moreover, it will to broaden the ambitions of nonprofit organizations, some of which will be more inclined to take on roles now relegated to the public sector as they expand and thrive.
One issue with Kimball’s proposal is this: given the relative inefficiency of U.S. public sector spending, it is not clear that his proposal will forestall further tax increases. If Medicare FFS exacerbates medical cost growth and tuition tax subsidies for high-earning households exacerbate higher education cost growth, this will continue to be true if these programs are left unreformed. Funds that flow to nonprofit organizations devoted to public purposes might reduce the underlying demand for public spending if this demand is unconnected to the structure of public programs themselves, but not if there is a connection.
What Kimball’s proposal does do, however, is address the normative demands made by egalitarians for higher taxes on the affluent (the notion of paying your fair share) while not directly addressing this structural dynamic. This is arguably a feature of Kimball’s proposal and not a bug, as it undermines the most potent case for higher taxes (the rich should bear more of the burden of making the investments we need to help vulnerable people flourish) without effectively rewarding public sector inefficiency.
Unfortunately, as Kimball would surely acknowledge, this proposal is wildly unrealistic, in no small part because it would drive a shift in resources from the public sector to civil society organizations that will embrace a wide variety of business models, not all of which will be incumbent-friendly. And over time, one assumes that incumbents will work to stymie empowering innovations in this space that prove threatening. That doesn’t change the fact that Kimball’s proposal is extremely interesting.