Economic Inequality and the Debates

In last night's debates for the nomination for president, the Democrats on stage spent some time addressing economic inequality. This week in the The Week I saw the following blurb about charitable giving.

Several months ago I was revving my engines to vent about the tax bill I paid this spring. It was the first time I would file under the 2017 tax change. I was convinced that my bill had risen. Turns out I was wrong. My true tax rate (the percentage of income I paid in federal income taxes) fell by a couple of percentage points.

This was true despite the fact that much of what I had been previously able to claim as a deduction under state and local taxes (SALT) was no longer eligible. I guess I live in the blue state part of Pennsylvania. I was surprised that our household so quickly passed through the $10,000 cap on SALT deductions. However, we live in a state where income tax rates are in excess of 3% and in an area that values public education and public services. Those total tax bills put us into five-digit territory pretty easily.

However, my biggest surprise in 2017 was that we didn't itemize our deductions. Instead, we took the standard deduction. I found this news a little irritating after having spent an hour inputting figures for charitable giving, taxes, and home mortgage interest into TurboTax (I guess that's a sunk cost).

And this is what brings me back to that snippet from the week: Charitable giving fell 3.4%.

Much has been made of how the 2017 tax law favors the rich. I'm learning, though, that this tilting of the scale is more subtle than I had originally considered. I did receive a tax break. So did most Americans. But the tax law did remove incentives for lower and middle class earners to do things for a tax advantage, such as buying a new home or (more importantly) give charitably. The only Americans who really benefit from the tax advantages on such activities are the wealthy, those with the means to cut checks so big that they can exceed the standard deduction threshold.

The impact of this is subtle yet powerful. First of all, it will discourage some charitable giving over time. In an ideal world, people give charitably because they want to do good. Only a cynic would say people do it just for the tax break. Yet a realist would point out that there will be a diminishing of the giving. In 2018 we saw it drop about 3.4%, in a year in which our president claims the economy was strong. By how much will it tail down in 2019?

Moreover, Americans will come to discover that for most of them, itemizing simply isn't worth the time and hassle. Many will become sloppier in their preparation of taxes and will, by the latter years of this tax law, start to actually leave money on the table.

And all this while, people of means will have increased leverage as they write their checks to good causes. Those who are wealthy will reap the tax benefits of giving generously, which I hope they do to good effect. Pardon me, though, for being skeptical that all such benevolence will be to the betterment of as many.

And pardon my cynicism when I consider the 2017 tax law to be a tax bill of the rich, by the rich, and for the rich.