As Justice Holmes observed, lawmaking consists in drawing lines.1 But how many lines do we need? Regarding charitable transfers, more than we have—so contends Professor Eric Kades, in a recent article.
Kades begins by observing a fundamental point that we often take for granted: as a legal category, charitability is monolithic. A transfer either is or is not charitable. Hence, an income tax deduction is either available or unavailable, depending on whether the tax commissioner acknowledges an entity or purpose as charitable. Although the exact range of purposes accepted as charitable varies among American states, and is defined independently under federal law for tax purposes, the binary nature of the classification is universal.
Kades argues that this attribute, resulting in either a 100% tax deduction or no deduction, is oversimplified. The deduction should instead fall along a continuum, depending on whether the transfer is “more or less charitable.” (P. 288.) Yet, under current law, “someone donating, say, $10,000 to a local food bank receives no greater deduction than someone donating the same amount to the National Mustard Museum.” (P. 302.)
Kades proceeds to explore the public policy of the charitable deduction. He concludes that a number of alternative utilities flow from charitable transfers, justifying their encouragement: (1) they may furnish public goods from which citizens collectively benefit (such as clean air), but which individuals would not contract for, given opportunities for free-riding; (2) they may redistribute resources in a manner that enhances fairness; (3) they may foster pluralism by floating or testing controversial ideas or policies; and (4) they may provide public benefits more efficiently or creatively than could a government bureaucracy. These incommensurable utilities can be valued differently, and—to make matters more complicated—each of them on its own falls along a continuum. Different transfers may furnish varying amounts of the relevant benefit.
In theory, then, the only justification for the all-or-nothing charitable deduction is simplicity (with its attendant conveniences). But, in an elegant application of the central-limit theorem, Kades demonstrates that the distribution of public benefits flowing from charitable transfers is bound to fall along a normal (i.e., bell-shaped) curve. Accordingly, the error costs of an all-or-nothing rule are likely to be high.
Kades proposes a framework for implementing a graduated charitable deduction intended to diminish the costs of the all-or-nothing system “without imposing excessive administrative costs.” (P. 328.) Rather than assess the deduction percentage on a donation-by-donation basis—the ideal, but also most costly, solution—Kades suggests a tiered approach. The tax commissioner would assign different charitable entities to different deduction categories, possibly informed by evidence the entities submit in their applications for tax-exempt status.
In this connection, Kades notably takes aim at core religious services, which deliver neither public goods, nor fairness, nor bureaucratic efficiency. They do advance pluralism—but to serve this end, the deduction would have to disfavor large, established churches as opposed to novel, non-traditional ones. Kades concludes that, in the context of religious contributions, current law provides “a deduction in search of a theory.” (P. 317.) Or, we might say, this branch of the deduction stems from politics, not theory. Yet, Kades is unafraid to propose eliminating the deduction for religious services that provide no secondary benefits, such as poor relief. (P. 332.)
Kades appreciates the practical difficulties inherent even in a tiered tax deduction for charitable transfers. For such a system to operate effectively, the tax commissioner would have to sub-categorize entities, such as museums of broad interest to the public versus ones that attract few visitors. Still, the resulting structure would be “much less complicated than a number of current tax code provisions.” (P. 334.) Furthermore, Kades contends that the structure he proposes “is well within the regulatory capacity of the IRS and would not add any complexity to taxpayers’ preparation of their annual returns.” (P. 334.)
These points are debatable. Taxpayers bear costs apart from those associated with complexity (which do appear nominal here) when preparing their returns. They also face information costs, which will rise if taxpayers must investigate nonuniform deductions when contemplating choices between alternative charitable contributions.
In addition, Kades’s analysis is confined to the income tax deduction. He does not factor the estate tax deduction into his analysis. Testamentary philanthropy often takes the form of charitable trusts, and these can vary quite a bit in their exact terms and purposes. Pigeonholing them into discrete categories might prove a greater challenge for the tax commissioner, adding to administrative costs. Moreover, the information costs borne by taxpayers would balloon in this context. Presumably, testators would want to know a priori how much of an estate tax deduction a unique charitable trust would garner—a matter that might require research into precedents, once they accumulate, or perhaps a request for a private letter ruling.
Even limiting the problem to taxation could be viewed as too narrow. The charitable deduction is just one of a farrago of rules applicable to charitable transfers and trusts whereby lawmakers grant them favorable status—the immunity of charitable trusts from the rule against perpetuities and the related rule against perpetual purpose trusts, the waiver of charitable trusts from the definite-beneficiaries requirement, their exclusive eligibility for revision under the cy pres doctrine, the enforceability of promises to make charitable gifts, known as charitable subscriptions, despite the absence of consideration or detrimental reliance, and so on.
Should those rules as well become subject to refinement, depending on the utility of the charitable purpose at issue? Several of the non-tax rules themselves take a binary form and thus (barring radical reformulation) appear incapable of operating along a continuum. A charitable trust is either eligible for modification under the cy pres doctrine or it is not, a promise is either enforceable as a charitable subscription or it is not. But rules regarding trust duration are more flexible. Under current law, all charitable trusts can continue in perpetuity. A graduated law of charitability could permit charitable trusts to endure for varying lengths of time. Would that make sense as a matter of public policy under Kades’s framework? Food for thought—or perhaps for a follow-up article.
None of this is intended as criticism. The best scholarship inspires further thought and interest. Published in a relatively obscure journal, this superb article has escaped notice thus far. Commentators have yet to discuss, or even to cite, Kades’s piece or the ideas he has developed.
This work merits attention.
- See Oliver Wendel Holmes, Jr., Law in Science and Science in Law, 12 Harv. L. Rev. 443, 456–57 (1899).
Trackbacks/Pingbacks