Gongol.com Archives: April 2024

April 10, 2024

Deduct your cash but not your services

Certain problems are vexing because they create plain and evident negative consequences -- but there is no clear evidence that any possible solution for those consequences won't be equally bad. A good example rears its head every tax season. ■ Economists will note that a market-clearing price can be found for most any good or service. It may be high, it may be low. It may come with externalities. But the price exists. And thus our society is prone to financializing most things. We tend to believe that charitable donations are a good thing, so we incentivize them by offering tax deductions. ■ In general, charity and welfare tend to be distributed most efficiently in the form of cash or cash-like transfers. While this isn't universally true (school lunch subsidies are a relatively clear counter-example), most of the time, it's better for recipients to get something they can allocate on their own. That's what makes the Earned Income Tax Credit broadly popular on both the left and the right. ■ But the opposite can be true on the other end: While cash payments are often better than goods for the receiver, it is sometimes (and perhaps even often) better for a donor to give in the form of services rather than cash. People with high-value skills can often do a lot more good by donating those skills "pro bono publico" than they might by earning income and then donating some of it as cash. ■ The tax code, however, rewards cash donations but does not reward the value of in-kind donations of services. This sets up a perverse set of incentives: The higher then value of the in-kind services one might donate, the lower the relative incentive to donate them pro-bono. Thus, an attorney who bills out at $300 an hour and takes home $100 of that $300 would have to work for three hours just to bring home the income to buy her own services on behalf of a charity. If that seems wholly inefficient, it's the fault of the tax code. ■ The lack of deductibility, of course, doesn't preclude accountants, attorneys, architects, engineers, doctors, nurses, dentists, graphic designers, computer programmers, and countless others from donating their high-value services. But the inconsistency of making their cash donations tax-deductible while offering no such incentive for their pro-bono services is counterproductive -- especially in an economy substantially dominated by the production of services. ■ The obvious case against permitting the value of in-kind service donations to be deducted is that it could open the door to considerable abuse. This is particularly vexatious because elite service providers are often well worth the price, and disincentivizing them from donating pro-bono services sets the entire charitable sector behind. Sometimes the sector gets access to those elite services anyway, but oftentimes it does not.