Just finished doing my taxes. Yay, that’s both enjoyable and an incredibly valuable use of my time. I spent only about three hours so far this year getting my paperwork together, shopping for low-priced software, asking for advice, filling out my taxes, making a couple of phone calls and adjusting my withholdings for next year – I usually spend closer to 10 hours. If we say that each of the 100 million households in America, as individials, spend 3 hours per year on administering their taxes, that’s 300 million hours. If our time is worth $25 per hour (median HH income?) then we are talking about $6 billion down the tubes. If each of us spends $50 on tax software and preparation services, that’s another $15 billion down the tubes. I suspect these are vast understatements of the burden that doing (not paying) taxes places on households. I am sure the number is larger by a factor of 10 for corporations, businesses and charities.
Which brings me to my real point. Take two otherwise identical individuals, Donation Donald and Volunteer Vinny. Suppose that each has an (taxable) income of $100,000 that places them in the 25% marginal tax bracket. For simplicity’s sake, suppose that income from $0 to $50,000 are charged 10% and income over $50,000 is charged 25%. In a world with no special treatment of charitable work, each would pay $17,500 in taxes, or an average tax rate of 17.5%. Now, suppose the tax code recognizes the “value” of charitable work (I personally question whether the lion’s share of charity is value enhancing, especially to recipients, but that is for a future post). The way the current tax code works is that (up to a point) each dollar you donate to charity is allowed to be deducted from the income that you claim is taxable. Suppose that Donald donates $20,000 to a charity of his choosing (most, I argue, are not really charities as you think of them, again that’s for another post). Vinny, on the other hand, is tight-fisted with his money, but instead he decides to spend 400 hours (8 hours per week) volunteering his time for the local charity of his choice. What happens to the tax bill of each?
For Donald, his taxable income would drop to $80,000 and his tax bill would fall to $12,500, a savings of $5,000 because he was willing to write a check for $20,000 to the “Save the Amoeba Foundation.” Vinny, on the other hand, spends all of his volunteer time caring for house-ridden elderly patients, (and a good deal of his own money commuting, communicating and so forth with the people he is helping). There is no formal charity set up, it’s just Vinny giving up his time and his own money. If his labor time is valued at $50 per hour, as his annual income indicates, he is donating the equivalent of $20,000 of his time to charity. What would his tax bill be for the year? $17,5000.
So here we have two people engaged in “charitable activities” and one faces a tax bill of only $12,5000 for donating money to a charity of questionable value (and spending no time at all aside from cutting the check) and we have another facing a tax bill of $17,500 for dedicating 8 hours per week to the care of senior citizens in his community, at great personal and time cost. Our tax code of course rewards the check writer and not the charity participator.
Yes the story is trite, and not all places you donate money to are useless and not all things you spend time on are valuable – but the simply point is that you cannot claim the time you spend volunteering as a reduction in taxable income but almost ANYTHING You physically give away can be counted as a deduction to your taxable income. There may be very practical reasons why we cannot count volunteer hours (e.g. is what I am going right now something that could count? It certainly is being done for free, on my own time, for no profits, and for some presumed public purpose, and while I view this activity to be pretty useless, it is not much more useless than most of the things masquerading as non-profits with tax-exempt status these days) as worthy of our tax consideration, but I cannot see either a compelling moral or theoretical argument for why the giving of one’s time (perhaps the most valuable thing we have) is so disfavored by our tax system.
Are there tax systems around the world that treat volunteered time differently?
Lest you think that I favor changing the tax code to include deductions for the value of your volunteered time, my actual position is that there should not be anything called a “charity” recognized by the tax code in any way, shape or form. Again, that’s for another post.