During the debate about how to resolve the fiscal cliff crisis, lawmakers on both sides have considered reducing the charitable tax deduction. That strikes many people as the wrong approach (especially those of us who work for non-profits!) even though we may not be able to explain why it’s such a bad idea.

Fortunately, John Carney has provided a superb explanation for why reducing or removing this deduction is counterproductive. For instance, changing the charitable deduction as Carney notes, has the same effect as another deduction that most of us didn’t even know exist: the deduction for volunteers.

Imagine that you serve a charity that pays you $15 a hour for your labor. Instead of cashing their checks, though, you immediately donate that money back to the charity. If this e was taxed and deduction was allowed, it would mean we were paying a tax on the time we volunteer to charities. But as Carney explains, this is the same thing as when we provide “free” labor to a charity. The e we forgo is equivalent to donated e.

The Internal Revenue Service does not currently impute this foregone e to taxpayers. But it certainly could do this. It could recognize that the volunteer is receiving and then donating an e. Under our current system, obviously this e should be deducted because it is charitably donated. Absent a charitable deduction, however, this e should probably be taxed.

[. . .]

If it sounds ridiculous to put a tax on volunteering that’s probably because it seems wrong to tax e that can only be imputed. It doesn’t seem like e at all. But we do tax imputed e already. We tax life insurance and healthcare benefits given to spouses by employers as e, even though the employee didn’t receive any e. Family courts will impute e in some cases where a spouse claims he or she earns no e to avoid child support payments. This isn’t something foreign to our system at all.

What makes taxing volunteer work seem so wrong is that we don’t think of time spent volunteering as producing e. Even if it is the “economic equivalent” of receiving e and donating it back, that’s doesn’t capture our feeling for what is happening when someone volunteers his or her time. We think of the labor provided as genuinely free.

If we oppose taxing labor given to charities, we should also oppose taxing e given to charities. “In either case, the value of the services wind up with the charity rather than the individual,” says Carney. “Should the source of the e—your employer rather than the charitable organization—really make all that much of a difference?”

There is much more to Carney’s excellent article, so be sure to read the rest.

(Via: First Things)