When I posted Monday about the Fair Tax, I knew my skepticism was going to invite a lot of disagreement, some compelling and some BY PEOPLE WHO HIT THE CAPS LOCK KEY AND CAN’T FIND IT AGAIN.
Many objected to my point, “Fair Tax supporters really can’t criticize President Obama for reducing the deduction level for charitable contributions when they want to eliminate the deduction for charitable contributions.”
Fair Tax backers aim for a plan that is revenue neutral — that is, they’re not trying to collect any less money than the current system; they just want to do it in a simpler, easier, and fairer manner.
So if government collects X, the Fair Tax system would collect X, but at the same time, remove the complicated smorgasbord of incentives and deterrents written into the tax code. There are many, many bad uses of the tax code to influence behavior, but I don’t think the charitable deduction is one of them.
So under the Fair Tax, the same amount of money is being taken from taxpayers, but we’ve eliminated an incentive to make charitable contributions. We can argue how many donors are motivated by the ability to take the deduction; charities say a lot, and the Obama Administration says it’s negligible. We can agree, however, that it’s not zero. Thus, the Fair Tax would end up reducing charitable donations.
Inevitably someone will write in saying, “But Jim, under the Fair Tax, taxpayers will have more of their income to donate.” No, they won’t, if the plan really is revenue-neutral, as its supporters claim.
UPDATE: The first couple responses are much more civil and better thought out than the last batch, and argue most compellingly that it isn’t inconsistent or hypocritical to oppose reducing the charitable deduction while still preferring a Fair Tax. I’m coming around on that.
A lot of folks argue that their economic circumstances would be improved by the Fair Tax, so they would donate more to charity. The tax is not revenue-neutral to individual taxpayers, but it is to taxpayers as a whole. As one reader put it, this might mean better news for the middle class and worse news for the wealthy, which might translate to fewer donations to art museums and more donations to churches and synagogues. But some portion of donations – we can argue about how many and the size, but they do exist — are motivated by the tax advantage, and those donations will disappear. Those who really want to dispute this point should take it up with the charities — but recognize that by doing so, they’re helping President Obama make his case in the process.
Others argue that under the Fair Tax, the economy will be so stimulated that everyone will be making more money and thus have more to donate to charity. I don’t want to get too far afield, but I’m not yet convinced that removing income taxes and instituting a sales tax of 23 percent on everything is guaranteed to increase everyone’s disposable income.