Opinion

By David G. Tuerck
Executive Director, BHI

Research shows that, once offered a tax credit, taxpayers would respond vigorously, eventually taking full advantage of the opportunity provided to direct their tax dollars where those dollars would do the most good.

Under this proposal, modeled on one offered earlier by Sen. Dan Coats, R-Ind., taxpayers could take a tax credit for certain contributions to charities that help the poor. The credit would be available for the first $500 in contributions by single filers and for the first $1,000 in contributions by married filers.

A tax credit increases the incentive to give by reducing the price of giving: The existing deduction permits an itemizing taxpayer to reduce his taxable income by $1 for every dollar contributed to a qualified charity. For a taxpayer in the 28 percent bracket, this means that the price of contributing $1 is 72 cents. A tax credit permits the taxpayer to reduce his tax bill by $1 for every dollar contributed.

By greatly increasing the individual's incentive to contribute to private charities, the credit would allow these charities to provide services now provided by government.

The existing system wastes billions of dollars filtering taxpayer money through the hands of professional bureaucrats before it reaches the poor. The new system would put money directly in the hands of the churches, neighborhood organizations and volunteers who see helping the poor as a calling as well as a profession.

The welfare debate is deadlocked over the false question of whether we should give taxpayers a break at the expense of helpless children. Marian Wright Edelman, leader of the recent "Stand for Children" rally in Washington, has described as "evil" the welfare cutbacks proposed in Washington and enacted in some states. The tax credit proposal, labeled by some as a "compassion tax credit," offers a chance to stand for children and the taxpayer as well.

Because of its very win-win nature, the Dole/Coats proposal is likely to get serious attention from Congress in the months to come and now, possibly also from a future president.

Defenders of the existing, failed welfare system are thus rushing to kill the tax-credit infant in its crib. Even before the idea gets a serious public hearing, the business press and the halls of Congress are abuzz with dark warnings about the consequences of an idea that would end the government welfare monopoly.

As the debate gathers momentum, therefore, it is useful to consider some of the criticisms that are being voiced. Some of these criticisms and the rebuttals to them follow.

"The tax credit would cause total assistance to the poor to decrease because the resulting tax-revenue losses would cause government to cut programs."

In fact, the tax credit would give taxpayers a chance to increase the total assistance going to the poor. The reason lies in the greater efficiency with which their tax dollars would be spent when placed in the hands of private charities rather than welfare bureaucrats.

Research shows that, once offered a tax credit, taxpayers would respond vigorously, eventually taking full advantage of the opportunity provided to direct their tax dollars where those dollars would do the most good. Indeed, the reason Dole/Coats and other proposals impose a limit on contributions eligible for the credit is to prevent taxpayers from channeling all their tax liability into the credit. Thus there would be no decline in total assistance - just a change from one provider (government) to another (private charities).

"The tax credit would cause total assistance to the poor to decrease because people who already contribute to the support of the poor would receive an additional unnecessary tax break."

Individual contributions to private charities account for less than 10 percent of all public and private assistance to the poor (provided under means-tested, nonmedicaid programs). This shortfall would be made up in part by the greater efficiencies achieved and by the greater success private charities could be expected to enjoy in ending dependency. If concerns still remain, the law could include a threshold making only new contributions eligible for the credit (letting contributions below the threshold remain eligible only for the existing deduction).

"The tax credit would create a preferential status for charities that qualify for the credit, causing taxpayers to increase their contributions to these charities at the expense of others."

That is, people would take money previously given to the symphony (for which they would only get a deduction) and give it to the Salvation Army (for which they could now get a credit).

Giving to the Salvation Army is no substitute for attending the symphony or for supporting the arts, as demonstrated by research showing a strong, positive correlation between giving to different types of charities.

As for preferential status, government currently takes hundreds of billions of taxpayer dollars to fund that particular charity which is the government welfare system.

"Money diverted to private charities would 'leak' into activities that do not help the poor and would increase administrative costs."

In fact, there is likely to be far less waste and leakage under the tax credit than there is now. By one estimate, only 41 percent of poverty-level families receive any government benefits and some 67 percent of all federal welfare spending ends up in the pockets of nonpoor.

Yes, government oversight would be necessary to prevent abuse, as it is with the existing tax deduction. But with billions of new dollars pouring into the system, private organizations would be formed to rate or monitor individual charities for their efficiency.

"Private charities would lack the capacity to handle the increased demand for their services."

About 85,000 private charities provide social and legal services to the poor and others. Many more would be formed as the tax credit made new funds available to support them. These charities would find that the most effective way to attract funds is to come up with effective methods of ending dependency while providing transitional assistance.

Concerns about the tax credit are voiced mainly by large public charities that have vested interest in preserving the status quo. Examples are United Way, which gets 40 percent of its support from government, and Catholic Charities, which gets 62 percent. It's little wonder that they are reluctant to scrap the existing system for one in which they would have to compete, along with every other charity, for support from millions of individual taxpayers.

As the debate over the tax credit idea unfolds, there will be other concerns that deserve careful consideration. What is important to avoid, however, is a rush to judgment against this idea, based on a panicky reaction by the welfare lobby and an underestimation of the ability of the private sector to combine efficiency with compassion.

David G. Tuerck is executive director of the Beacon Hill Institute and chairman and professor of economics at Suffolk University. This article first appeared in The Tribune of New Albany, Indiana on June 27, 1996.

Format revised on 18 August, 2004