Minnesota Law Review

Generous to a Fault? Fair Shares and Charitable Giving

Charities play a vital role in our society. In addition to enhancing pluralism, they meet many societal needs more efficiently, creatively, and effectively than government alone. Charities aid our poor, teach our youth, improve our health, comfort us spiritually, and enrich our cultural lives. Given the charitable sector’s importance and value, it is not surprising that the tax code encourages philanthropy by allowing a deduction for charitable gifts. What is surprising is that it treats the most generous among us less favorably than those of average generosity. This mismatch stems from one of the most puzzling limits in the Internal Revenue Code: the cap preventing an individual from claiming a charitable deduction greater than fifty percent of her income, even if she gives more than half her income to charity. As a result, someone who generously donates all her income to charity must still pay income tax.

Why limit generosity? Current literature exploring the issue of whether an individual who gives all her income to charity should also pay some income tax or whether the Code’s current limits are an appropriate means of implementing that rule is scarce and shallow. Only one explanation—that precluding individuals from deducting large charitable gifts serves as a crude alternative minimum tax ensuring that everyone above a certain economic income pays some tax—has gained any support. That explanation is insufficient. It does not answer the question of why an individual who keeps no income for herself and instead donates it all to a cause deemed worthy enough to merit a charitable deduction—such as feeding the poor, supporting educational institutions, or funding the arts—should still pay some tax.

This Article begins to answer the question—“Why limit generosity?”—by arguing that under the economic subsidy theory for the charitable deduction, internal constraints on the legislative process explain and justify a percentage-of-income limit. This Article’s argument proceeds directly from the literature conceptualizing the charitable deduction as a way of overcoming market and government failure for various public goods by spurring nonprofits to produce them. It suggests that limiting the charitable deduction to some portion of one’s income reflects a bargain between individuals whose preferred public goods are fully funded by the government and those whose projects are only partially subsidized. This bargain is necessary to reconcile the private provision of public goods via charitable giving with our democratic legislative process.

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