The Hidden Limits of the Charitable Deduction:
Behavioral economics introduced the concept of salience to law and economics. In the area of tax policy, salience refers to the prominence of taxes in the minds of taxpayers. This article complicates the literature on salience and taxation by introducing the concept of “hypersalience,” which is in many ways the mirror image of hidden taxation. While a revenue-raising tax provision must be hidden for taxpayers to underestimate their tax bill, a revenue-reducing tax provision – such as a deduction, exclusion, or credit – must be more than fully salient for taxpayers to underestimate their tax bill. In other words, the provision itself must be salient, but the limits of that provision must be hidden, or low-salience.
This article uses the charitable deduction to illustrate the concept of hypersalience. While the charitable deduction is extremely salient to many taxpayers, not all taxpayers who believe that they will benefit from the deduction are correct. In fact, even though many Americans are aware that donations are tax-deductible, fewer than 50% of taxpayers can take advantage of the charitable deduction.
The concept of hypersalience is important for several reasons. First, it highlights the role of non-governmental actors in fostering taxpayer ignorance about the tax system. This article suggests that the hypersalience of the charitable deduction is at least partly due to marketing efforts by private third-party beneficiaries. Second, it complicates economic models, such as those of price elasticity of giving, and suggests that certain tax provisions may be more treasury efficient than previously thought. Third, it may lead to increased consumption of certain goods.
This article concludes that, although hypersalience may mean that the government is able to induce greater behavioral distortions without losing revenue, the costs of this phenomenon outweigh its benefits. Because hypersalience is due to taxpayer misunderstanding and the actions of third-party beneficiaries acting in their own interest, this article proposes several possible avenues for curtailing this phenomenon.
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