Megan McArdle asks whether merchandise bought at charity auctions should be tax deductible? She seems to imply that they should not be because you are paying ‘fair market value.’ Here is the story that motivated the question.
This is all very well except charity auctions are different. The reason is that it is not a ‘fair’ market value but a market value induced by the ‘charity’ part. That part may change the winner’s willingness to pay (they realise it is for charity and so bid more) and also other bidders’ (who are losing) willingness to pay (for the same reason). So if you win such an auction, you are (at least in part) donating. What is more, the tax deductibility serves exactly the same function for these auctions as it does for non-auction donating: it increases the money raised by the charity up to the level of the tax deduction.