Saving The Charitable Deduction And More

deductionsFor some time now politicians of both parties have been talking about ways to get America’s fiscal house in order. The Democratic chant is “We’ve got to raise taxes on the wealthy.” The Republican chant is “We’ve got to curtail spending.” To no one’s surprise, the two sides have been at impasse, largely because neither side is genuinely committed to its own chant, let alone accepting of the other side’s.

Despite their lust for taxing, Democrats will be sure to keep the loopholes for their wealthy supporters. (Yes, Virginia, they too have wealthy supporters.) And frugality pledges notwithstanding, Republicans know that to get their pet projects approved, they have to approve their colleagues’ pet projects. (So much for curtailing spending.) Add to that the fact that both Parties have to keep their respective lobbies happy, and it’s clear why we’ve been treated to lots of posturing and simulated outrage but not much else. Much talk, little action.

Lately, however, an idea has arisen that is showing signs of bipartisan support. The idea is to limit the income tax deduction for charitable contributions. It was part of Governor Romney’s plan, President Obama has made it part of his, and John McCain, among others, seems to have signed on.

Democrats can claim that limiting charitable deductions will close a loophole and make the rich pay their fair share. Republicans see it as a convenient way to get Democrats off their backs about favoring the wealthy without offending their base too much. Both parties can pat themselves on the back for responsible governance.

The only problem is that limiting charitable deductions will diminish contributions to charity, perhaps significantly, and hurt not only charitably agencies but, more tragically, the people they help around the world.

There is, however, a more sensible two-pronged approach that will simultaneously solve several problems:

  •  Prong 1: Instead of limiting the charitable deduction, enhance it by giving two dollars credit for every dollar donated with no limit on the amount given. In other words, a person who gives $5,000 to charity will be able to deduct $10,000 on her tax return. One who gives $100,000 will deduct $200,000.

This enhancing of the deduction will have a salutary effect on charitable giving. People who already give generously to charity will be motivated to give even more, and ungenerous people will find it in their interest to become generous. (The latter group includes those elected officials who spend their constituents’ money with abandon but when it comes to spending their own money can’t find their wallets.)

Simply said, rewarding charitable giving will encourage more giving. It’s not hard to imagine how much aid the Salvation Army, the Red Cross, Doctors Without Borders, Catholic Relief Services, Food for the Poor, Save the Children and hundreds of similar private organizations would be able to provide with a dramatic increase in funding.

  •  Prong 2: Eliminate the federal government’s foreign aid programs altogether.

Whenever abolishing foreign aid has been proposed in the past, the idea has been met with cries of insensitivity toward the poor and needy of the world. As a result, caring people, particularly those motivated by the religious ideal of loving one’s neighbor, have rejected the idea. But eliminating foreign aid while simultaneously stimulating private aid should help to change their view.

Undertaking both efforts (Prongs 1 and 2) will ensure that the poor will not be abandoned—the only change will be in the way they are aided. Moreover, the savings gained from eliminating foreign aid will help to offset the decrease in revenue from the increased tax deduction for charitable giving. It might, in fact, produce a surplus.

But wouldn’t we lose more than we gain by eliminating foreign aid? Isn’t there some special value in governmental giving? Considerable research suggests the answer to both questions is “No.” For decades, researchers have found that foreign aid typically does more harm than good!

In a comprehensive evaluation entitled “The Failures and Fallacies of Foreign Aid” (available online) Professor David Osterfield summarized the findings of numerous studies. Among those findings are the following:

  •  Most developed countries, including Japan, Hong Kong, Singapore, and various countries in Western Europe, succeeded with little or no foreign aid.
  •  In many cases, foreign aid has not benefited the common people at all. In some cases, food aid has actually increased malnutrition.
  •  Where foreign aid has benefited people, it has also tended to undermine “thrift, industry, and self-reliance” and created dependency rather than self-sufficiency.
  •  One study shows that foreign aid has produced “stagnation, dependence, disaster and despair” in a number of cultures.
  •  In many places, such as India, Egypt, Guatemala, and Kenya, food aid has driven local farmers out of business.
  •  In Micronesia, foreign aid was responsible for a decline in “every category of agriculture,” including coconuts, vegetables, and citrus fruits.
  •  In a majority of cases foreign aid has led to expanded bureaucracy that hinders economic growth.
  •  Often, instead of solving a country’s problems, foreign aid has subsidized the very policies that caused the problems. In many cases, it has also increased the scale of corruption, resulting in considerable amounts of aid money ending in the private bank accounts of politicians in aid-receiving countries.

From the studies he examined, Osterfield concluded that government-sponsored “foreign ‘aid,’ by its very nature, retards economic growth and development.”

This fact alone would be more than enough justification for ending foreign aid. But there is more to consider in the area of military aid. The problem is, both Democrats and Republicans have frequently chosen the wrong individuals and groups to support with military aid, ones that quickly became enemies of the United States and their own people. (Some analysts would say, perhaps correctly, that the very fact of our supporting those individuals and groups increased their temptation to corruption and tyranny.)

The evidence seems clear that when the U.S. government gives military aid, the recipient countries are likely to perceive—in most cases, correctly—that the action is motivated less by brotherly concern and more by selfish interests. (Countries that receive military assistance are, for the most part, ones our government wishes to make more democratic or ones whose stability is deemed in our national interest.)

The perception that the U.S. interests are selfish naturally leads to resentment rather than gratitude. Moreover, when the aid is stolen or otherwise misused by the receiving governments, the people blame not only the local thieves and incompetents but the U.S. as well.

Here are the main benefits of simultaneously enhancing (rather than limiting) the tax credit for charitable deductions and simultaneously eliminating the government’s foreign aid program:

  • Individual charitable giving will increase.
  • Because there is more virtue in freely chosen giving than in coerced redistribution, the givers will profit spiritually and psychologically.
  • Private aid agencies, which are typically much more efficient than our government, will be able to expand their efforts.
  • The waste, inefficiency, and profligacy of existing government-sponsored foreign-aid will end.
  • The needs of the poor in other countries will be more effectively and meaningfully met.
  • Because of the sharper focus of private agency programs and their greater accountability in spending, corrupt leaders will have less opportunity to profit at their people’s expense.
  • Foreign recipients of private aid will have less reason to be suspicious of our motives for giving.
  • Fomenters of anti-American sentiment in other countries will find it more difficult to achieve their ends. In other words, the image of America as a plundering colonial power will be a tougher sell.
  • We will take a small but vital step toward the reduction of the federal government to the size envisioned by the Founders.

I submit the changes to the charitable deduction and foreign aid program I have outlined here are not merely worth hoping for but also worth recommending to our elected officials.

Copyright © 2012 by Vincent Ryan Ruggiero. All rights reserved