One of the common arguments made by skeptics of the FairTax is that charitable donations will decrease without an income tax deduction.  My counter point is that giving is a function of the capacity of people to give, not favorable (but complex) tax policy.  To put it simply, you can’t give what you don’t have.

Inc. magazine looked at the charitable giving of people who are self made entrepreneurs compared to people who inherited their money.  This excerpt supports my belief, at least for this demographic.

Wealthy donors also claimed to be far less influenced by prevailing tax policies than is often thought, researchers said. Despite dire warnings by some business groups that failure to repeal the federal estate tax will result in a decline in charitable giving by the rich, more than half of the study’s respondents said the amounts they donate would stay the same regardless of any changes to the tax.

An equal number also said they would continue giving even if there were no tax deductions for charitable donations at all, the study said.

Rather than seeking tax shelters, more than 86 percent of respondents said they were motivated to give by the opportunity of “meeting critical needs” in society, while 82.6 percent said they were moved by a “feeling that those who have more should give to those with less,” the study said.

Whatever their motivation, wealthy households gave an estimated $126 billion out of national total of $260 billion last year in contribution to the non-profit sector, according to Patrick Rooney, the center’s director.

Here is a quick look at the mechanics of giving under the current income tax system and the FairTax system.

Let’s pretend that you have a job that pays a salary, but you are independently wealthy and use your vast pile of cash to pay all your expenses.  You donate all of the money from your salary to charity.  If you earn $50,000 per year and 10% ($5,000) is withheld for federal taxes you are left with $45,000 to donate.  On April 15 you can file a tax return listing your charitable contributions and your taxable income will be $5,000, which you will get back in the form of a “refund“.  You can then donate the remainder of your income to the charity of your choice.

Under the FairTax no taxes are withheld from your earnings.  You can give every nickel you earn to charity and you don’t have to tell the government who you gave it to.

Which system makes charitable giving easier?

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This entry was posted by Brian on Saturday, November 4th, 2006 at 8:55 am and is filed under FairTax. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. Please note the copyright policy.