Backwards Down The Number Line?
The disconnect between the principles and practices of the new wave of ostensibly fiscally conservative politicians may not be a unique feature of those serving on the federal level. As I previously noted, U.S. House Republicans, behind the fiscal leadership of Rep. Paul Ryan, may be a bit mixed up when it comes to the privatization of healthcare benefits. The situation at the state level, where Michigan legislators, with the strong support of Governor Rick Snyder, have eliminated state income tax credits for charitable donations, is a bit more conceptually nuanced.
Earlier this month, the Flint Journal reported on the policy change:
As part of a massive tax reform bill signed into law last month, all state income tax credits for charitable donations were eliminated to help close Michigan’s $1.5 billion budget deficit.
The tax measure is expected to save the state $35 million or more a year. . . .
In 2009, the $35 million the state gave back for tax credits leveraged nearly $100 million in charitable giving to nonprofits.
Kristin Longley, “Michigan income tax credits for donating to charities end next year,” Flint Journal (June 13, 2011). In eliminating the tax credit, Snyder “relied on research that showed charitable giving doesn’t necessarily hinge on a tax credit, but rather a personal cause or inclination toward generosity.” Id.
As best I can tell, economists of all stripes probably would agree that, as a general policy matter, eliminating tax credits is good because a broader tax base taxed at a lower rate is preferable and less distorionary, and because “tax credits,” more properly termed “tax expenditures,” are a less transparent form of government spending. (For more on these ideas, see my earlier comment here.)
By eliminating tax credits, Snyder is trimming government spending, an unobjectionable outcome for fiscal conservatives. Charitable donations may present a special case, however, for the fiscally conservative view that government should tax less so that it spends less in order to stay out of the way of the private sector, which, the view holds, can provide services more effectively and efficiently. A perhaps less frequently enunciated, but necessary tenet of this view is that citizens freeing themselves from the burden of compulsory wealth redistribution (i.e., taxes to fund social services) must personally shoulder the burden of private charity. To do otherwise (just as to privatize services even where privatization will lead to less effective and more inefficient provision of those services) is simple greed, and greed is not the basis of fiscal conservatism or any other viable political theory.
Does elimination of the charitable donation tax credit do more to benefit the provision of private charity by allowing taxpayers to hold more money for that purpose, rather than filter it through the governing apparatus, or does maintaining the credit do more to benefit the provision of private charity by (imperfectly) removing money from the public taxing-and-spending cycle funds that no longer need to be used for publicly provided services? (At the very least, there is an empirical tax question here that is beyond my grasp: does the state net more money by eliminating the tax credit that it can turn around and spend on public services, do taxpayers end up with more in their pockets for private charity under the broad-base/low-rate tax structure, or is the best result an appropriately valued tax credit combined with a decrease in public spending on services?)
In debating the elimination of the credit, the two sides seem to be talking slightly past each other. The Governor’s view, in part, is that elimination of the credit is acceptable because the credit “doesn’t necessarily” provide a real incentive for giving– people decide to give based on other reasons. Proponents of the credit, though speaking with multiple voices, seem to see the credit as part incentive (to do good), part reward (for having done good), and part compromise (by freeing more assets for private use without evaporating resources for public services). In other words, the credit is more than an incentive, and saying that it may not function as one is not a complete justification for its elimination.
State-level politicians may simply be choosing among competing fiscally conservative values in this case, rather than being (apparently) ignorant of them, as in the federal-level situation I previously described. I do find merit in the broad push to eliminate tax expenditures, but I think it is worth asking whether charity presents a special case worthy of exceptional treatment.
Phish – “Backwards Down the Number Line,” Joy (2009)