How does the income tax damage charity?

Recently, Oprah made headlines by giving a "free" car to every member of the audience on one of her talk shows.

Of course, there's no such thing as a "free" car, notes Paul Caron, the blog's publisher and a University of Cincinnati law professor. And even if Pontiac were to pay not only the sales tax but all the various income taxes that the recipients will owe on the value of their new cars, there would be taxes due on the value of any "free" tax payments too, a calculation known as a gross up.

But they're not really free. They have value, and for something that large, they have enough value to impose income tax liabilities.

Brenda Schafer, a manager for tax analysis and advice support at H&R Block, has heard stunned prizewinners wailing before. The company's clients include former participants on reality shows. Whether they got a "free" new face on "Miami Slice" or a new wardrobe on "Queer Eye for the Straight Guy" or had their $50,000 ranch house turned into a $300,000 mansion--they'll have to pony up to the IRS.

And it's the recipients who have to pay the taxes. The giver can probably manage to write off the cost of the gift as a charitable contribution somehow. But the value of the gift is still taxed.

What's the overall effect of this? The taxation of charitable contributions is shifted from the rich to the poor. And don't forget there are a lot of other "progressive" policies that are designed to shift costs the other way. The entire tax code is an exercise in cost shifting. That doesn't benefit anyone other than the IRS.

As for Oprah, Ms. Schafer says, "she's thinking she's giving gifts, but there's no getting around the fact that it's a prize for being in the audience." And according to her rough, unofficial calculation, someone in the 15% federal bracket (making, say, $28,000 as an individual, or $56,000 if filing jointly) and a 5% state bracket who gets a $30,000 car (the figure for the G6 is about $28,500) will owe an extra $6,000 in taxes. For a single earner in the 33% bracket kicking in at $143,500, the car adds $12,000 in tax.

Imposing that amount of additional tax will severely damage the financial planning of most recipients.