Though economists want coherent tax systems, this is a lost cause. The general framework of any tax may have logic but in the details, political clout and economic power always trump coherence and fairness.
Take recent initiatives to reduce excessive tax deductions taken by people who give used cars to charities. In itself, the crackdown makes perfect sense. When compared, however, to other breaks that largely benefit wealthy taxpayers, this crackdown clearly is biased against the average person.
If you itemize deductions on your income tax return, you can deduct gifts to charities. If you give physical property rather than cash, you can deduct its fair market value. This applies to farms left to colleges as well as to household items dropped off at the Salvation Army.
In recent years, Goodwill, the National Kidney Foundation and other charities began to accept donations of used cars. They accumulate a batch of cars and auction them off or sell them wholesale. The logic is no different from donations of old VCRs. The donor could sell the car or the VCR. But the transaction costs of finding a buyer are high. Donating the item saves a hassle while the deduction, in effect, puts cash in the donor’s pocket.
Charities get the net amounts from selling the items. Accepting physical donations increases administrative costs, but motivates contributions that otherwise would not occur.
There is, of course, an incentive for donors to overestimate the value of their donated vehicles. Claim a $1,000 deduction for a car that sells for $500, and you double your tax break. Studies by the Internal Revenue Service show that what charities actually get from vehicle sales is substantially less than the claimed deductions.
On its face, limiting inflated vehicle values is justified and is no different from curbing fictional deductions for business mileage expense. But compare restrictions on donated vehicles to how we treat donations of corporate stocks and the inequity becomes apparent.
We allow people who own stock special treatment if they donate it to charity. The donor can deduct the market value of the stock, regardless of the price originally paid. If the stock increased in value after purchase, no income tax applies to the capital gain.
This doesn’t make sense. Buy a share of stock for $20, sell it later for $100, and give the money to charity. You owe taxes on capital gains of $80 and can deduct $100 in charitable donations. Buy a share for $20, hold it until it is worth $100, and donate the share to charity. You get a $100 charitable deduction and owe no capital gains tax.
The government foregoes taxes. Benefits are split between donors who pay less tax and charities that get greater donations. This is little different from allowing $500 deductions on $100 donated beaters.
Is stopping inflated auto donation deductions a good idea? Yes, but let’s also eliminate the appreciated stock donation scam so beloved by churches and public radio organizations alike.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.