Most of the major tax system overhaul proposals introduced in the reform-minded 104th Congress have been reintroduced in the current session. The Council on Foundations and Independent Sector commissioned the Washington National Tax Service of Price Waterhouse LLP and the Washington, D.C. law firm of Caplin and Drysdale to examine the impact on charities of several of these reforms. The resulting study, “The Impact of Tax Restructuring on Tax-Exempt Organizations,” includes a comprehensive econometric analysis of three proposed tax plans:
The Flat Tax: This single-rate tax (17 percent in its current form) on income would eliminate the charitable deduction and repeal the estate and gift taxes.
National Sales Tax: Levied at the point of sale, this tax would be based on consumption. It would apply to both goods and services and eliminate the need to file an individual tax return.
Unlimited Savings Allowance Tax (USA Tax): The plan would increase marginal income tax rates but allow taxpayers to deduct the income that they save. Investment income is taxed if withdrawn for consumption or deducted if reinvested in saving.
What follows is a portion of the executive summary of “The Impact of Tax Restructuring on Tax-Exempt Organizations,” followed by analysis from Stephen Moore, director of fiscal policy studies at the Cato Institute and a former economist for Rep. Dick Armey, for whom he helped draft the flat tax bill.
Overall, the analysis determined that changes in the tax price of giving — by abolishing the charitable deduction or by increasing or decreasing marginal rates — will have a substantial impact on charitable giving. Giving will decrease 19 percent for each 10 percent increase in the price of giving. This effect swamps increases in giving as a result of increases in income. On average, a family will give about 3 percent more to charity when its income increases by 10 percent and about 3 percent less when its income decreases by 10 percent.
Applying these results, tax-restructuring proposals constructed like the Flat Tax would depress charitable giving by individuals and depress it by a significant degree. If a Flat Tax with no charitable deduction and an individual tax rate of 21 percent had been in place in 1996, giving by individuals would have dropped from an estimated $104 billion to $71 billion. Repeal of the estate tax would cause estate giving to drop by $3 billion, while corporate giving under a Flat Tax would decline by about another $1 billion. Altogether, giving under a Flat Tax with a 21 percent rate would be about $37 billion lower than under the current system. Substituting a 17 percent tax rate makes little difference; giving would only be about $600 million higher than under the 21 percent rate.
Because it retains a deduction for charitable giving, extends it to nonitemizers, and substantially increases marginal tax rates for many taxpayers, a tax constructed like the USA Tax could significantly enhance individual giving, perhaps by as much as $34 billion.
All three tax reform proposals contain incentives for consumers to increase savings. The USA Tax explicitly allows taxpayers to deduct their savings from their income and establishes high marginal tax rates to provide a further incentive to do so. However, both the Flat Tax and the Retail Sales Tax also encourage saving — the Flat Tax by exempting income from savings and the Retail Sales Tax by taxing only consumption. There is substantial disagreement among analysts about whether any of these proposals will actually increase saving; current law already contains provisions for tax-free savings through various retirement plans that taxpayers do not fully utilize. But, to the extent that these proposals work as their authors intend, some of the increases in savings may come at the expense of charitable contributions. If this occurs, there will be a greater drop in giving under the Flat Tax and less growth in giving under the USA Tax than this study predicts.
Tax reform also could affect existing tax incentives for charitable giving from estates. Abolishing the estate tax, as both the Flat and Retail Sales Taxes do, would have reduced charitable bequests by about $3 billion out of an estimated $7 billion in 1996. While bequests currently are a small fraction of total charitable giving, the estate tax has the potential to stimulate much larger charitable giving in the future. Estimates of the forthcoming intergenerational transfer of wealth run from $7.5 to $9 or even $10 trillion. Corporate giving also would be negatively affected by tax reform proposals that do not include a tax incentive for business giving, declining by about $1 billion under either the Flat Tax or USA Tax proposal.
While fewer than 30 percent of all taxpayers itemize their deductions — and thus have a tax incentive for charitable giving — these donors account for almost 75 percent of all individual charitable contributions, making them an important force in the support of all charities. Even for religious institutions, which have the lowest proportion of itemizers to nonitemizers and have donors in all income classes who give generously, the average gift by itemizers outweighs that of nonitemizers by about three to one. Religious charities also rely on higher-income, itemizer donors to make the large capital gifts that make possible the construction and renovation of buildings and facilities.
Besides their impact on charitable giving, various tax reform proposals would impose taxes directly on nonprofits, undercutting the principle that voluntary organizations should operate free from taxation and impeding their ability to provide essential services. As currently drafted, many of these proposals are fraught with unintended consequences that would raise the cost to charities even higher.
As currently proposed, the Flat Tax exempts charities from the tax on business income, but would shift some of the present federal income tax burden to charities by taxing the value of the employee benefits they provide. The USA Tax also exempts most charities from the tax on business income. However, some groups, such as those that undertake policy analysis and public education as well as some child care centers and all social welfare organizations, would pay tax on their income. In addition, there are questions under the USA Tax about whether certain kinds of income would remain exempt, especially rental income and income from royalties.
Of the three major tax reform proposals, the National Retail Sales Tax, as currently drafted, would have the greatest financial impact on charities. This impact stems from three basic factors. First, the tax introduces a commerciality standard that would result in taxation of the major portion of charities’ program service revenue. Second, many charities would pay tax on their purchases. Third, the operation of the state uniformity provisions makes it probable that charities will lose the benefit of existing state sales tax exemptions. Together, these changes will result in charities facing increased expenses with diminished revenue.
Finally, tax reform could affect the ability of charities to finance their capital needs through tax-exempt bonds. Interest income would no longer be taxable under either the Flat or Retail Sales Tax and would be eligible for the savings deduction under the USA Tax. The impact of this change on charities that use tax-exempt financing is not predictable except that they will have lost the market advantage the present system confers.
As a nation, we are embarked on a bold initiative to scale back federal spending on many concerns that are also the focus of charitable activity. Nonprofit charitable organizations are on the front lines of this experiment and charities are being called on to expand their efforts, even as government funding for their activities is declining. Considering tax restructuring in this context, maintenance of both robust tax incentives for charitable giving and tax exemption for charities is essential to preserving the ability of charities to fulfill their ongoing responsibilities.
Stephen Moore responds:
After reading this report, one would have to believe that prior to the passage of the 16th Amendment authorizing America’s first federal income tax in 1913, there were no such things as hospitals, churches, civic leagues, charities, or universities in America. Such entities could not have existed prior to then because evidently their very life-blood is the charitable tax deduction.
Make no mistake about it: this report by the Council on Foundations and Independent Sector is meant to turn charitable groups and other tax-exempt organizations into enemies of a fairer, flatter, simpler tax system. The report concludes that “the loss of tax incentives for charitable giving will cause a substantial reduction in giving.” Under the flat tax, individual charitable contributions would drop from $104 billion to $71 billion, a fall of more than 30 percent. According to the report, charitable organizations would face an even more catastrophic drop in contributions if the income tax were completely abolished in favor of a 16 percent national sales tax.
But before charitable groups rush to team up with H&R Block, the realtors, mortgage bankers, municipal bond traders, the accounting industry, and the nation’s multitude of tax attorneys to lobby against reform of our current 8,000-page tax code, here is some reassuring news. Independent Sector’s (IS) track record in predicting the impact of tax changes on charitable giving has been wrong in the past. During the debate over the Tax Reform Act of 1986, IS predicted that the reduction in tax rates in that act would trigger an $8 billion decline in charitable contributions in 1987. Instead, charitable giving rose by $6.4 billion, or 7.6 percent, in 1987 after the top tax rate fell from 50 percent to 28 percent. Alan Reynolds of the Hudson Institute has noted that IS actually underestimated the impact of the 1986 tax reform act on charitable giving over the period 1987-94 by a gigantic $40 billion. Oops.
In this most recent study, Independent Sector and the Council on Foundations commissioned the Washington tax division of Price Waterhouse (PW) to run computer simulation models on how tax changes might affect giving. This is like asking Phillip Morris to prepare a study on the economic impact of abolishing cigarettes. Having worked in the trenches over the past four years on the flat tax and sales tax, I can personally attest to the fact that virtually every major accounting firm is an aggressive adversary of tax simplification.
Still, the question raised by this report should be of great concern to all philanthropic groups: Would a low-rate tax system with no charitable deduction slow the pace of charitable giving? The current tax preference for donations to charities and other nonprofits clearly is a powerful inducement for writing a check to one’s favorite cause. Under both the sales tax and the pure flat tax (some flat tax proposals suggest retaining the charitable and home mortgage deductions), these long-standing tax inducements would vanish. These tax reform proposals would also end the death and capital gains taxes. Currently, wealthy individuals often escape death and capital gains levies by turning over assets to charitable groups. Also, by abolishing the charitable deduction, the flat tax and sales tax reduce the tax-preference for philanthropic giving.
According to the PW economic model employed in this study, there are two factors that impel giving: the tax price effect and the income effect. The tax price effect measures the value of the charitable deduction. The higher the tax rate, the greater the incentive to give. Under the current tax code, with a top tax rate of 40 percent, the giver reduces his tax liability by 40 cents for every dollar paid to the charity. The income effect measures the impact of an increase in a household’s income level on the amount it gives during the year.
The critical question is, which effect dominates the other? The PW model says that every 10 percent drop in the tax-price effect (through lower tax rates or the loss of the deduction entirely) causes a whopping 19 percent reduction in giving. But every 10 percent increase in family income causes giving to rise by just 3 percent. “The [tax] effect swamps increases in giving as a result of increases in income,” is the report’s sobering conclusion.
Now, one of the deceptions of the report is that the conclusions highlighted in the Executive Summary assume there will be no income effect whatsoever from a switch to a flat tax or a national sales tax. The economy will perform exactly the same whether we have a flat rate tax or our current system. If that were the case, then the conclusion that charitable contributions would fall under tax reform is entirely self-evident.
But the lesson of the last twenty years in the U.S. and around the world is that tax reform reduces the distortions of high tax rates, encourages more savings and investment, and thus propels faster economic growth. PW’s tax accountants may not believe this, but most economists do. In fact, the dean of the economics department at Harvard University estimates that a flat rate consumption tax system would increase GDP by between 9 and 13 percent. The well-respected National Bureau of Economic Research has come up with similar growth estimates from a flat or sales tax. So the starting assumption of this report is wildly off base — and that erroneous assumption contaminates most of the rest of the reported conclusions.
It is true that unobtrusively near the end of the study, the PW modelers run the numbers taking into account the possibility of dynamic increases in economic output and personal incomes from tax reform. But, incredibly, the model still churns out results suggesting that “induced economic growth would help charities, but not greatly, because the income effect on giving is weaker than the adverse price effect.” In fact, a 5 percent increase in economic growth would increase charitable giving under the PW model by a microscopic $0.8 billion a year. A 10 percent surge in growth causes giving to rise by just $1.6 billion. Does that result seem even remotely plausible? Not if history is any guide. Figure 1 shows that over the past forty years the level of annual donations almost exactly tracks personal income growth. People are most likely to dig deepest into their pockets when they are feeling prosperous. Conversely, during hard times, many wells run dry.
Taken to its logical extremes, the PW model yields rather improbable results. If low tax rates are bad for charities because they reduce the after-tax value of giving, then high tax rates must create vast windfalls for charities. How could we maximize donations to nonprofit entities? Easy. Increase marginal income tax rates to 90 percent or more. The model would suggest a tidal wave of new funds filling the coffers of America’s charities. Even if these high rates wrecked the economy and sent Americans’ incomes plummeting, charities would still come out ahead because, remember, PW tells us that the price effect would “swamp” the income effect.
The most compelling case against the validity of this report is that its conclusions are contradicted by what Alan Reynolds aptly describes as “the paradox of the 1980s.” At that time, a lowering of tax rates from 70 to 28 percent (which meant that the tax price of giving more than doubled) actually impelled a surge in giving. Contributions rose in the 1980s no matter how you slice them: in real terms, in real per capita terms, and even as a share of personal income. Either the 1980s didn’t really happen, or the PW model is tragically flawed.
Still, it is natural for philanthropic institutions to worry about the loss of a charitable deduction that has been an American institution for more than 80 years. This is the one method that the government has relied on to promote the socially vital function fulfilled by charities. Fortunately, a flat tax and the charitable deduction are not incompatible. I have argued that the flat tax should be an alternative to the current tax system, not a replacement. That is, every individual should have the freedom to choose. If the taxpayer wishes to continue to take deductions, he is welcome to comply with the current code. But if the taxpayer wishes to short-circuit the 8,000 pages of instructions and forms and tax law, he can fill out the flat-rate post card return. The charitable deduction, the mortgage deduction, the municipal bond interest deduction, and so on would be preserved for whomever wished to take them.
I believe that this approach would make everyone happy: workers, businesses, realtors, charities, even Independent Sector and the Council on Foundations. Everyone, that is, except for Price Waterhouse.
Most of the major tax system overhaul proposals introduced in the reform-minded 104th Congress have been reintroduced in the current session. The Council on Foundations and Independent Sector commissioned the Washington National Tax Service of Price Waterhouse LLP and the Washington, D.C. law firm of Caplin and Drysdale to examine the impact on charities of several of these reforms. The resulting study, “The Impact of Tax Restructuring on Tax-Exempt Organizations,” includes a comprehensive econometric analysis of three proposed tax plans:
The Flat Tax: This single-rate tax (17 percent in its current form) on income would eliminate the charitable deduction and repeal the estate and gift taxes.
National Sales Tax: Levied at the point of sale, this tax would be based on consumption. It would apply to both goods and services and eliminate the need to file an individual tax return.
Unlimited Savings Allowance Tax (USA Tax): The plan would increase marginal income tax rates but allow taxpayers to deduct the income that they save. Investment income is taxed if withdrawn for consumption or deducted if reinvested in saving.
What follows is a portion of the executive summary of “The Impact of Tax Restructuring on Tax-Exempt Organizations,” followed by analysis from Stephen Moore, director of fiscal policy studies at the Cato Institute and a former economist for Rep. Dick Armey, for whom he helped draft the flat tax bill.
Overall, the analysis determined that changes in the tax price of giving — by abolishing the charitable deduction or by increasing or decreasing marginal rates — will have a substantial impact on charitable giving. Giving will decrease 19 percent for each 10 percent increase in the price of giving. This effect swamps increases in giving as a result of increases in income. On average, a family will give about 3 percent more to charity when its income increases by 10 percent and about 3 percent less when its income decreases by 10 percent.
Applying these results, tax-restructuring proposals constructed like the Flat Tax would depress charitable giving by individuals and depress it by a significant degree. If a Flat Tax with no charitable deduction and an individual tax rate of 21 percent had been in place in 1996, giving by individuals would have dropped from an estimated $104 billion to $71 billion. Repeal of the estate tax would cause estate giving to drop by $3 billion, while corporate giving under a Flat Tax would decline by about another $1 billion. Altogether, giving under a Flat Tax with a 21 percent rate would be about $37 billion lower than under the current system. Substituting a 17 percent tax rate makes little difference; giving would only be about $600 million higher than under the 21 percent rate.
Because it retains a deduction for charitable giving, extends it to nonitemizers, and substantially increases marginal tax rates for many taxpayers, a tax constructed like the USA Tax could significantly enhance individual giving, perhaps by as much as $34 billion.
All three tax reform proposals contain incentives for consumers to increase savings. The USA Tax explicitly allows taxpayers to deduct their savings from their income and establishes high marginal tax rates to provide a further incentive to do so. However, both the Flat Tax and the Retail Sales Tax also encourage saving — the Flat Tax by exempting income from savings and the Retail Sales Tax by taxing only consumption. There is substantial disagreement among analysts about whether any of these proposals will actually increase saving; current law already contains provisions for tax-free savings through various retirement plans that taxpayers do not fully utilize. But, to the extent that these proposals work as their authors intend, some of the increases in savings may come at the expense of charitable contributions. If this occurs, there will be a greater drop in giving under the Flat Tax and less growth in giving under the USA Tax than this study predicts.
Tax reform also could affect existing tax incentives for charitable giving from estates. Abolishing the estate tax, as both the Flat and Retail Sales Taxes do, would have reduced charitable bequests by about $3 billion out of an estimated $7 billion in 1996. While bequests currently are a small fraction of total charitable giving, the estate tax has the potential to stimulate much larger charitable giving in the future. Estimates of the forthcoming intergenerational transfer of wealth run from $7.5 to $9 or even $10 trillion. Corporate giving also would be negatively affected by tax reform proposals that do not include a tax incentive for business giving, declining by about $1 billion under either the Flat Tax or USA Tax proposal.
While fewer than 30 percent of all taxpayers itemize their deductions — and thus have a tax incentive for charitable giving — these donors account for almost 75 percent of all individual charitable contributions, making them an important force in the support of all charities. Even for religious institutions, which have the lowest proportion of itemizers to nonitemizers and have donors in all income classes who give generously, the average gift by itemizers outweighs that of nonitemizers by about three to one. Religious charities also rely on higher-income, itemizer donors to make the large capital gifts that make possible the construction and renovation of buildings and facilities.
Besides their impact on charitable giving, various tax reform proposals would impose taxes directly on nonprofits, undercutting the principle that voluntary organizations should operate free from taxation and impeding their ability to provide essential services. As currently drafted, many of these proposals are fraught with unintended consequences that would raise the cost to charities even higher.
As currently proposed, the Flat Tax exempts charities from the tax on business income, but would shift some of the present federal income tax burden to charities by taxing the value of the employee benefits they provide. The USA Tax also exempts most charities from the tax on business income. However, some groups, such as those that undertake policy analysis and public education as well as some child care centers and all social welfare organizations, would pay tax on their income. In addition, there are questions under the USA Tax about whether certain kinds of income would remain exempt, especially rental income and income from royalties.
Of the three major tax reform proposals, the National Retail Sales Tax, as currently drafted, would have the greatest financial impact on charities. This impact stems from three basic factors. First, the tax introduces a commerciality standard that would result in taxation of the major portion of charities’ program service revenue. Second, many charities would pay tax on their purchases. Third, the operation of the state uniformity provisions makes it probable that charities will lose the benefit of existing state sales tax exemptions. Together, these changes will result in charities facing increased expenses with diminished revenue.
Finally, tax reform could affect the ability of charities to finance their capital needs through tax-exempt bonds. Interest income would no longer be taxable under either the Flat or Retail Sales Tax and would be eligible for the savings deduction under the USA Tax. The impact of this change on charities that use tax-exempt financing is not predictable except that they will have lost the market advantage the present system confers.
As a nation, we are embarked on a bold initiative to scale back federal spending on many concerns that are also the focus of charitable activity. Nonprofit charitable organizations are on the front lines of this experiment and charities are being called on to expand their efforts, even as government funding for their activities is declining. Considering tax restructuring in this context, maintenance of both robust tax incentives for charitable giving and tax exemption for charities is essential to preserving the ability of charities to fulfill their ongoing responsibilities.
Stephen Moore responds:
After reading this report, one would have to believe that prior to the passage of the 16th Amendment authorizing America’s first federal income tax in 1913, there were no such things as hospitals, churches, civic leagues, charities, or universities in America. Such entities could not have existed prior to then because evidently their very life-blood is the charitable tax deduction.
Make no mistake about it: this report by the Council on Foundations and Independent Sector is meant to turn charitable groups and other tax-exempt organizations into enemies of a fairer, flatter, simpler tax system. The report concludes that “the loss of tax incentives for charitable giving will cause a substantial reduction in giving.” Under the flat tax, individual charitable contributions would drop from $104 billion to $71 billion, a fall of more than 30 percent. According to the report, charitable organizations would face an even more catastrophic drop in contributions if the income tax were completely abolished in favor of a 16 percent national sales tax.
But before charitable groups rush to team up with H&R Block, the realtors, mortgage bankers, municipal bond traders, the accounting industry, and the nation’s multitude of tax attorneys to lobby against reform of our current 8,000-page tax code, here is some reassuring news. Independent Sector’s (IS) track record in predicting the impact of tax changes on charitable giving has been wrong in the past. During the debate over the Tax Reform Act of 1986, IS predicted that the reduction in tax rates in that act would trigger an $8 billion decline in charitable contributions in 1987. Instead, charitable giving rose by $6.4 billion, or 7.6 percent, in 1987 after the top tax rate fell from 50 percent to 28 percent. Alan Reynolds of the Hudson Institute has noted that IS actually underestimated the impact of the 1986 tax reform act on charitable giving over the period 1987-94 by a gigantic $40 billion. Oops.
In this most recent study, Independent Sector and the Council on Foundations commissioned the Washington tax division of Price Waterhouse (PW) to run computer simulation models on how tax changes might affect giving. This is like asking Phillip Morris to prepare a study on the economic impact of abolishing cigarettes. Having worked in the trenches over the past four years on the flat tax and sales tax, I can personally attest to the fact that virtually every major accounting firm is an aggressive adversary of tax simplification.
Still, the question raised by this report should be of great concern to all philanthropic groups: Would a low-rate tax system with no charitable deduction slow the pace of charitable giving? The current tax preference for donations to charities and other nonprofits clearly is a powerful inducement for writing a check to one’s favorite cause. Under both the sales tax and the pure flat tax (some flat tax proposals suggest retaining the charitable and home mortgage deductions), these long-standing tax inducements would vanish. These tax reform proposals would also end the death and capital gains taxes. Currently, wealthy individuals often escape death and capital gains levies by turning over assets to charitable groups. Also, by abolishing the charitable deduction, the flat tax and sales tax reduce the tax-preference for philanthropic giving.
According to the PW economic model employed in this study, there are two factors that impel giving: the tax price effect and the income effect. The tax price effect measures the value of the charitable deduction. The higher the tax rate, the greater the incentive to give. Under the current tax code, with a top tax rate of 40 percent, the giver reduces his tax liability by 40 cents for every dollar paid to the charity. The income effect measures the impact of an increase in a household’s income level on the amount it gives during the year.
The critical question is, which effect dominates the other? The PW model says that every 10 percent drop in the tax-price effect (through lower tax rates or the loss of the deduction entirely) causes a whopping 19 percent reduction in giving. But every 10 percent increase in family income causes giving to rise by just 3 percent. “The [tax] effect swamps increases in giving as a result of increases in income,” is the report’s sobering conclusion.
Now, one of the deceptions of the report is that the conclusions highlighted in the Executive Summary assume there will be no income effect whatsoever from a switch to a flat tax or a national sales tax. The economy will perform exactly the same whether we have a flat rate tax or our current system. If that were the case, then the conclusion that charitable contributions would fall under tax reform is entirely self-evident.
But the lesson of the last twenty years in the U.S. and around the world is that tax reform reduces the distortions of high tax rates, encourages more savings and investment, and thus propels faster economic growth. PW’s tax accountants may not believe this, but most economists do. In fact, the dean of the economics department at Harvard University estimates that a flat rate consumption tax system would increase GDP by between 9 and 13 percent. The well-respected National Bureau of Economic Research has come up with similar growth estimates from a flat or sales tax. So the starting assumption of this report is wildly off base — and that erroneous assumption contaminates most of the rest of the reported conclusions.
It is true that unobtrusively near the end of the study, the PW modelers run the numbers taking into account the possibility of dynamic increases in economic output and personal incomes from tax reform. But, incredibly, the model still churns out results suggesting that “induced economic growth would help charities, but not greatly, because the income effect on giving is weaker than the adverse price effect.” In fact, a 5 percent increase in economic growth would increase charitable giving under the PW model by a microscopic $0.8 billion a year. A 10 percent surge in growth causes giving to rise by just $1.6 billion. Does that result seem even remotely plausible? Not if history is any guide. Figure 1 shows that over the past forty years the level of annual donations almost exactly tracks personal income growth. People are most likely to dig deepest into their pockets when they are feeling prosperous. Conversely, during hard times, many wells run dry.
Taken to its logical extremes, the PW model yields rather improbable results. If low tax rates are bad for charities because they reduce the after-tax value of giving, then high tax rates must create vast windfalls for charities. How could we maximize donations to nonprofit entities? Easy. Increase marginal income tax rates to 90 percent or more. The model would suggest a tidal wave of new funds filling the coffers of America’s charities. Even if these high rates wrecked the economy and sent Americans’ incomes plummeting, charities would still come out ahead because, remember, PW tells us that the price effect would “swamp” the income effect.
The most compelling case against the validity of this report is that its conclusions are contradicted by what Alan Reynolds aptly describes as “the paradox of the 1980s.” At that time, a lowering of tax rates from 70 to 28 percent (which meant that the tax price of giving more than doubled) actually impelled a surge in giving. Contributions rose in the 1980s no matter how you slice them: in real terms, in real per capita terms, and even as a share of personal income. Either the 1980s didn’t really happen, or the PW model is tragically flawed.
Still, it is natural for philanthropic institutions to worry about the loss of a charitable deduction that has been an American institution for more than 80 years. This is the one method that the government has relied on to promote the socially vital function fulfilled by charities. Fortunately, a flat tax and the charitable deduction are not incompatible. I have argued that the flat tax should be an alternative to the current tax system, not a replacement. That is, every individual should have the freedom to choose. If the taxpayer wishes to continue to take deductions, he is welcome to comply with the current code. But if the taxpayer wishes to short-circuit the 8,000 pages of instructions and forms and tax law, he can fill out the flat-rate post card return. The charitable deduction, the mortgage deduction, the municipal bond interest deduction, and so on would be preserved for whomever wished to take them.
I believe that this approach would make everyone happy: workers, businesses, realtors, charities, even Independent Sector and the Council on Foundations. Everyone, that is, except for Price Waterhouse.
