This year, Mormons will likely be disproportionate beneficiaries of the charitable deduction as they deduct money paid for tithing. The issue is whether allowing Mormons this deduction makes economic sense.
The charitable deduction functions to lower the cost of giving. If taxpayer in a 40% tax bracket were to donate $100, he “saves” $40 in taxes because he would have had to pay a tax of $40 on that $100 if not for the deduction. A common justification for this deduction is that it encourages additional money to flow to and thus benefit charities. The problem, however, is that if people’s donations to charities are inelastic—that is, people will give the same amount regardless of the tax consequences—donors are the primary beneficiaries of the deduction and the charities get no additional income.
To see this point, consider the following scenario developed by one of my professors:
Assume a world with no charitable deduction. A taxpayer in a 40% tax bracket intends to make a $100 donation. Then, the charitable deduction is introduced. Will he respond by giving more? Let’s consider the options:
Option One: the donor gives exactly the same amount that he previously intended. Thus, he gives $100, but his cost after the deduction is only $60. The charity is not made better off by the deduction—it received the same amount it would have without the deduction. Instead, the government “spends” $40 in uncollected revenue that goes to the donor.
Option Two: the donor gives just a little more than he intended. For example, the donor gives $150 and his real cost after the deduction is only $90 (the government “matched” with $60 (40% of 150)). In this scenario, the donor gives $50 more than he would have without the deduction. But $10 of the $60 government benefit still goes to the donor. The government would be better off giving the charity a grant of $60 rather than allowing the donor a deduction.
Option Three: the donor gives additional amounts that are greater than the amount “spent” by government on the deduction. For example, the donor gives $200 to charity and the real cost to the donor is $120 (government matches with “$80”). In this case, the donor gives $100 more than he intended, and the cost to the government is only $80. If donors typically behaved as in option three, then the deduction would be a good way for the government to encourage money to go to charities—they spend only $80 and the charity gets $100 benefit.
There are, of course, other ways a donor could behave. And, the deduction might encourage people to give who otherwise would not. But the basic point is that if the donor would give the same amount in a world without the deduction as in a world with the deduction, then it is unclear why the government should “spend” money that lowers the donor’s costs but does not provide any additional benefit to charities.
Because Mormons are asked to pay a fixed percentage of their income to tithing, most active Mormons would pay 10% regardless of the charitable deduction. If that’s the case, Mormons are reaping tax savings, but the Mormon Church isn’t seeing additional benefits. Accordingly, allowing charitable deductions for mandated amounts of tithing probably doesn’t make tax sense.
Note: In the comments, feel free to also discuss other deductions you take in pursuit of church activities (i.e., deductions for mission expenses).