Although the charitable deduction is a popular policy, I will argue that it fails on both libertarian and social democratic grounds.
We should begin by establishing a definition of of charitable giving. First, charitable giving is a private act; it refers to what an individual does with his/her own money in contrast to what a government does. Second, the recipient of the money is doing work that the donor expects will advance his/her vision of a good society. Third, charitable giving differs from investment in that the donor does not expect pecuniary return on the funds contributed. So, taken together, charitable giving refers to the private contributions of individuals to institutions that they believe to be advancing the good of society and from which they expect no pecuniary return.
The charitable deduction as a part of a tax code enables an individual to subtract charitable donations from his/her total income, thus reducing the total amount of money on which s/he has to pay taxes. The simplest justification for the charitable deduction would also be threefold: that private individuals know better how to spend their money to better society than the government does, that the government cannot by itself address the problems of society, and that the government should provide incentives for private individuals to contribute to the betterment of society.
Even though the first two justifications clearly echo a libertarian philosophy, the last justification runs against libertarian principles, specifically the central claim that the government should be blind to the economic, social, and political activities of its citizenry. According to libertarians, the income tax is a violation of liberty first and foremost because it removes the blindness to individual economic actions and requires the release of information on economic gains for government oversight. However, viewing the income tax as a given, it should be as neutral to the economic activities of private individuals as possible. Consequently, all tax credits and deductions are resolutely anti-libertarian because they consist of actions taken by the government to encourage or discourage private economic actions. Why should the government's tax collector care whether an individual does or does not contribute to charity? Additionally, why should the government have the right to know to which institutions an individual chose to allocate funds, especially in cases in which no economic gain will result?
Moreover, by offering the charitable deduction, the government is, effectively, endorsing the decisions on what institutions to which an individual has chosen to contribute. A hate group like the Ku Klux Klan, as it is a membership organization, is a 501(c)3 organization; the government, consequently, subsidizes all donations to the KKK.
The social democratic argument against the charitable deduction stems from opposition primarily to the first justification provided for the charitable deduction and partially to the second justification. In other words, the social democrat does not agree with the claim that private individuals know how to allocate their funds better than the government can, and even though the social democrat acknowledges that the government cannot solve all problems, s/he still believes in the power and efficacy of the government as an actor for social betterment. In this context, the charitable deduction is taking money away from the social services that the government provides, depriving it of the opportunity to shore up funding for existing programs or innovate with new ones.
"Yes, I understand both of your points. But people won't donate to charity without the charitable deduction," you might respond. To believe so is to have very little faith in human beings. Are people so selfish and stingy that we need to dangle dollars in front of their face in order to break the viselike grip they have over their wallets? Isn't the virtue of benevolence that one expects nothing in return? Shouldn't the desire to contribute to the betterment of society as an individual be something inculcated in the young through parenting and schooling and, thus, need no financial incentive? I would not be willing to say that charitable donations would not drop in the face of an elimination of the charitable deduction because I have no empirical proof either way, but I think it would be a sad reflection on human character if they did.