Some 150 years ago, Alexis de Tocqueville wrote: “The greatness of America lies not in being more enlightened than any other nation, but rather in her ability to repair her faults.”
Today, America’s financial well-being is threatened by its continued reliance on an antiquated regimen of tax laws and regulations to generate the revenue needed to support our government’s spending priorities.
Many of these provisions served their purposes well when enacted and implemented. For most, that time has passed.
The House Committee on Ways and Means recently examined itemized deductions for charitable contributions as part of its tax reform deliberations.
Some will applaud the committee for focusing on a high-visibility deduction such as charitable giving. We at Americans For Fair Taxation feel strongly that by looking at single provisions of the tax code, the committee is effectively abdicating its responsibility to analyze and critique the current tax code as a whole to determine whether it is the right tool to vouchsafe America’s economic viability in the 21st century.
Instead, we urge the committee to discard this aging taxation infrastructure and replace it with the FairTax plan, an approach without the revenue-depleting deductions and exemptions that are relevant to the economic needs of our nation today.
I can already hear the tsunami of lobbyists talking about how any tax code changes will forever destroy their particular special interests.
Since Americans For Fair Taxation did not testify during the committee’s hearings earlier this year, I would like to provide the committee with an additional perspective from someone with considerable experience in charitable giving.
The Giving USA Foundation announced in its Annual Report on Philanthropy for 2012 that total charitable contributions by individuals, corporations and foundations had reached $298 billion in 2011, down from a record high in 2007.
“Experts” will postulate that any modification that reduces the taxpayer’s charitable deduction and captures more revenue will discourage philanthropy by diminishing a donor’s incentive to give. This is a myth that must not be perpetuated.
People give because they believe in what an organization does — with or without a tax incentive. In fact, two-thirds of all taxpayers never submit an itemized tax return, yet they still regularly donate to their favorite charities.
But for donors who do itemize, the incentive does impact their total contribution depending on whether they are using pre- or post-tax dollars.
Let’s look at someone who has a fixed charitable contributions budget of $1 million. Under the current tax system, if the intended charity has tax-deductible status, e.g. a 501(c)(3), they will receive the donor’s entire $1 million contribution.
If, however, the organization does not have tax-deductible status, e.g. a 501(c)(4), the federal government will first take $400,000 in income taxes from the donor, thereby reducing the donor’s available contribution dollars to just $600,000.
In both examples, the donor allocated $1 million for a charitable donation, but in the latter case, the charity was shortchanged $400,000 because of the current income tax code. Therein lies the problem.
What the committee is failing to take into account is the considerable financial shortfall the broader income tax code is causing charitable organizations across this great nation.
Under the FairTax plan, there are no tax deductions, exemptions or exclusions. By concurrently eliminating the income/payroll tax system and replacing it with a single rate tax on consumption, the FairTax plan effectively taxes wealth and borrowing when spent.
As a result, that same donor who allocated $1 million for charitable giving has all of the money the donor earned — in this case, $1 million — available for donation to any charitable organization. And the organization will receive the entire $1 million donation.
The 113th Congress has the chance to provide the leadership that seems to have been missing in the eyes of the overwhelming majority of Americans — Democrats, Republicans and Independents alike.
Instead of conducting a mind-numbing, piecemeal examination of a tax system that has consistently proven its ineffectiveness, it is time for congressional decision makers to cease renovating a broken infrastructure and instead rebuild it. It is time for FairTax.Robert McNair is co-founder of Americans For Fair Taxation and chairman and CEO of the Houston Texans.