Shannon Weeks McCormack (UC-Davis) has posted Not All Good Deeds Can Be Rewarded: Using Economic Analysis to Define the Rational Limits of the Charitable Deduction, 52 Ariz. L. Rev. ___ (2010), on SSRN.  Here is the abstract:

For almost a century, taxpayers have been entitled to deduct amounts donated to designated organizations, thereby reducing their taxable income. Since its enactment, the number of organizations able to receive tax-deductible contributions has rapidly proliferated, creating a situation that is neither economically sustainable nor appropriate. This Article suggests how the charitable deduction can be rationally limited, using subsidy theory as a starting point. Subsidy theory identifies the circumstances in which a deduction is needed to encourage giving that would not occur in its absence. Under this theory, a deduction is warranted for efficiency-enhancing transfers to organizations providing underfunded public goods. While providing a useful framework, little has been written on how to conduct the needed inquiries regarding efficiency and underfunding. This Article seeks to fill that gap. The Article first develops guidelines to determine when charitable donations can be considered efficient. Several cases are presented and analyzed. In cases where harms are limited, there is a strong argument for a charitable deduction, as transfers are likely to be efficient using the Kaldor-Hicks model of efficiency. However, in cases where taxpayers are actively harmed – that is, where donated funds are used in a manner which affirmatively worsens the position of some group – it is argued that the Pareto model should be applied, which would result in the deduction being disallowed. This analysis provides a novel and objective way of looking at controversial aspects of the charitable deduction. It, for instance, suggests that the controversial campaign and lobbying restrictions should be maintained, if not strengthened. After discussing efficiency, the Article turns to the question of underfunding. Using general economic models of groups, it identifies circumstances in which a deduction is needed to encourage investment in sub-optimally provided goods and, perhaps more importantly, identifies circumstances in which the deduction is likely unneeded because production levels are already optimal. By providing an objective economic framework, this Article offers a meaningful way to limit the ever-expanding scope of the charitable deduction.