This year, I joined the Cato Institute. Technically, I am a sponsor of Cato Institute, and my sponsor's fee qualifies as a tax-deductible donation to a §501(c)(3) educational institute.
It did strike me as odd that I was making a tax-deductible gift to a libertarian think tank. That libertarian intellectuals sought and received special tax status tells me that we have pushed the federal tax code into the Twilight Zone.
This lone, Schedule A deduction got me to thinking about all of the organizations that receive tax-exempt status and, more importantly, asking myself why do we allow tax-deductible contributions in the first place?
We as a nation have a history of convoluted court decisions regarding the separation of church and state. The courts tell us that public school teachers aren't supposed to promote religion with daily prayers. The courts say that churches can't set up Nativity scenes on courthouse plazas if the displays promote religion.
On the other hand, the government allows for parishioners to deduct their contributions to their church. Provided, of course, that the Internal Revenue Service has sanctioned their church.
If you start a church that celebrates the Deity with bong hits for Jesus, then the IRS is likely to say that your church is not a real church. On the other hand, the IRS conveniently looks the other way when politicians make political speeches from the pulpits of Atlanta's Ebenezer Baptist Church and Jerry Falwell's Thomas Road Baptist Church.
I won't pick on the political endeavors of Catholics, Jews, Hindus or Muslims at this time. Lord knows, Christopher Hitchens ("God Is Not Great") has done that dance.
But as for the tax-deductibility of contributions to churches, three things need said.
First, tax-deductibility creates an incentive to give. Second, tax-deductibility for one special group means that all other taxpayers subsidize that donation. And finally, all mainstream churches spend a portion of their domestic contributions conducting missionary work in foreign lands.
Some fair questions exist, then. Is the federal tax code really supposed to be involved in sanctioning contributions to religious entities? Is the IRS within its bounds to define a church or religion? Is it in the best interests of our tax-collection policies to subsidize the Jehovah's Witnesses membership drive in the Amazon rain forest? If religion and state are to be separate, how can the federal tax code allow deductions for contributions to religious entities? After all, these donations promote religion.
Tax-deductible charitable contributions to educational institutions have been allowed for a long time. Everyone agrees that bona fide educational expenses include tuition scholarships, distinguished faculty chairs and the cost of constructing and maintaining academic buildings.
On the other hand, it is a real stretch to say that donations for new Astroturf and a multi-million-dollar scoreboard for the football field fall under the guise of education. Contributions to the athletic fund that are made for the sake of getting good stadium seats aren't exactly educational donations either.
Currently, two Ivy League university foundations are being sued for misspending endowment money. These lawsuits arose because the universities allegedly failed to spend the money in accordance with the donors' directives. If true, should the donors lose their prior tax deductions?
Duke University will pay out millions of dollars to settle the Duke rape case. Most, if not all, of this money will come from Duke's tax-exempt foundation. Should the solicitation of money to shield the school's management from personal liability qualify as a tax-deductible educational contribution?
Tax-deductible contributions of property are rife with overvaluation of the conveyed assets. The IRS should require that donors sell the property at auction and donate the actual sale proceeds. You and I both know that appraisals in these instances drift to the high side.
Millions of lower-income Americans donate "what they can" to a church, or to the Salvation Army, or to the Humane Society. They donate to the Red Cross disaster fund. They buy the flour and sugar for the school bake sale. But these taxpayers seldom get to claim a deduction for their charity as the tax code usually persuades them to opt for the standard deduction.
Thus, a philosophical question needs answered: Does the government (via the IRS) have a guiding philosophy regarding charitable contributions, or is Form 1040 just an arbitrary, and sometimes feel-good, accounting exercise?
If I could revamp the federal tax code, I would eliminate charitable deductions altogether -- even if that means my giving up sponsorship of the Cato Institute.