As most every tax practitioner in town makes their pitch on year-end tax planning to clients, research organization the Tax Foundation recently released a new report making an economic case against the federal deduction for charitable gifts.

According to "Charities and Public Goods: The Case for Reforming the Federal Income Tax Deduction for Charitable Gifts," few charities designated under the tax code actually provide services that wouldn't otherwise be supplied in the marketplace without a tax subsidy.

Since the early 1900s, the Internal Revenue Code has defined a wide range of groups as charities, but the report notes that charities defined in the economic sense -- those needing to be subsidized due to the risk of elimination through market failure - aren't receiving the bulk of tax deduction benefits.

In the definition of a market failure used to justify the charitable tax deduction, a breakdown in trade between buyers and sellers causes inefficiencies in the system, usually failing to allocate socially beneficial "public goods."

According to the National Center for Charitable Statistics, one year ago hospitals and universities received nearly 57 percent of charity revenues. From an economist interest in promoting the distribution of public goods, neither is primarily a charitable organizations because their services -- hospital care and research and classroom instruction -- are largely unavailable to so-called free riders, consumers who wouldn't pay for the services, and in using those services, the amount left for the rest of society decreases.

Nonprofit human services groups receive just 6.5 percent of charity revenue, while scientific research, civil rights and environmental quality groups receive less than 1 percent each. As foundation staff economist Andrew Chamberlain, co-author of the study, said in a statement, "There's no justification for subsidizing services that free markets will normally provide ."

The report cites figures from the Independent Sector that in fact, only 20 percent of charity revenues come from private charitable gifts, while 38 percent come from program fees -- including school tuition, hospital patient charges and admission fees for events. Another 31 percent comes from government contracts and grants. According to the latest available data from the IRS, about 70 percent of the nearly $900 billion of revenue reported by charities in 2001 came from program fees. That same year, charitable gifts accounted for just 13.7 percent of total revenues, while revenues from government grants reached almost 10 percent.

In its early November report, the President's Advisory Panel on Federal Tax Reform recommended expanding the charitable deduction, dropping proposals such as extending the charitable deduction to all gifts in excess of 1 percent of income; allowing taxpayers who don't itemize to deduct gifts; and allowing taxpayers to sell property and donate the proceeds to charity.

A final interesting note the Tax Foundation's report makes is that more than 75 percent of tax benefits from the charitable deduction go to the 12 percent of taxpayers with incomes over $100,000.

Of course, there are likely real world flaws to consider in any economist's mostly textbook-based case. But the point may be one top-tax-bracket individuals looking to unload cash at yearend might want to consider.

The nonpartisan Tax Foundation, by the way, is itself one of those nonprofit-qualified organizations. Formed during the Great Depression and concerned about rising federal spending and taxing, the group was formed by a number of business executives. It's nice that the foundation, whose status as a provider of public goods would likely be safe under an revision of the charitable donation definition, was at least willing to take a harder look at an issue too often glossed over by others.

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