Government budget surpluses are a major problem. Just as in the Kennedy-Johnson years 35 years ago, the progressivity of the tax system is causing surpluses that will, if not curbed, bring an end to economic expansion. Democrats know that. Republicans know that. They are battling now, not over whether to reduce the mushrooming surpluses, but over how to cut them.
Just days ago, President Clinton vetoed Congress' bill to abolish estate and gift taxes, not because he wants budget surpluses to grow and choke off economic expansion, but because he prefers other uses of the surpluses.
What both parties have overlooked is that alternative ways of dealing with the surpluses would have dramatically different side effects. Lost in the debate is the effect that cuts in estate and gift taxation as well as personal income tax rates would have on nonprofit organizations. To the hundreds of thousands of charitable nonprofits that rely heavily on donations for their life-blood, tax cuts are deeply disturbing.
At first glance, it would seem that with lower taxes, individuals will have more money, which would increase donations to nonprofit universities, hospitals, museums, arts organizations and anti-poverty programs. But with lower taxes, individuals have less incentive to cut their tax liabilities by increasing their charitable giving. That frightens charitable nonprofits.
The basic point is clear. For the itemizing taxpayer paying 39 percent in income taxes (the highest income tax bracket), for example, giving $1,000 to charity costs only $610. With estate taxation as high as 55 percent, giving a charity $1,000 costs only $450.
The math is simple, and research bears out that tax cuts reduce donations. In other words, when taxpayers have the choice between giving to government via high taxation or giving to charities via significant tax reduction, private charities can expect to receive more.
But the larger point is that we have to find an alternative for dealing with the unintended consequences and vagaries of tax rates.
The need for medical care for the uninsured does not decrease simply because tax rates fall. The need for basic medical research does not decrease simply because tax rates fall. The needs for affordable housing, education and health care for low income persons, for environmental preservation and for strengthening of museums, culture and the arts do not decrease simply because tax rates fall.
Nonprofit charities are valuable, and government should not be responsible for all social services. Tying donations to the vagaries of tax rates must go. Consider that 40 million Americans don't have health insurance; rapidly increasing college tuition rates are pricing low-income youth out of the market; academic medical centers are squeezed financially by pressure from HMOs; and nonprofit organizations in every other industry are scrambling for new sources of revenue to meet social needs.
Based on years of research in this area, I propose an alternative: tax credits.
The idea is simple. Every donor to a charitable nonprofit would reduce his or her tax liability by a rate of, say, 50 percent, which would be the same for all taxpayers; it would not vary with the donor's income or wealth.
If public policy makers decided to further encourage or discourage charitable giving, depending on needs, the tax credit rate accordingly could be increased or decreased. No longer would the incentive to donate increase or decrease as an accidental side effect of broader policy affecting income and estate taxation and their progressivity.
Tax credits for charitable donations are not revolutionary. They already exist in the United Kingdom and Israel.
In the United States the last half-century has witnessed rapid growth of the nonprofit sector both absolutely and relative to government. Nonprofit charities are too important for us to link the donations they receive to tax policies that have entirely different goals. The time for tax credits for charitable giving is here.
BURTON A. WEISBROD is an economics professor at the Institute for Policy Research, Northwestern University. He served as a senior staff member of the Council of Economic Advisers to the president.