A couple of thousand years ago, my understanding is that it was generally believed that events on the planet Earth were controlled by an array of fairly egomaniacal gods. Good weather and good harvests depended on appeasing these gods with various sacrifices, splendid temples, and so forth. And in an overwhelmingly agricultural economy, this kind of god-appeasing activity is clearly a critical public service. In a very homegenous society, you can best achieve that god-appeasing through direct state investment in the temple sector (a single-payer religion initiative, so to speak) but in a diverse democracy it would make more sense to decentralize the appeasement process by establishing a generous tax subsidy for religious activities.
And that's more or less where we are, even though the Wrath of God theory of the business cycle is largely out of favor in policy circles. Consequently, Mina Kimes ends a fascinating and wonky discussion of in-the-weeds ways to reform the charitable income tax deduction with rather blunt call to stop using the IRS as a tool to subsidize churches:
Studies have shown that the price elasticity of giving for religious donations is relatively low, which means that people would be unlikely to cut their gifts in response to a lowered tax break. Indeed, many religious donors do not currently claim a deduction.
If the government is serious about saving money, then it should consider exempting religious donations from the charitable tax break. Most people give to churches because they want to, not because they get a tax break for their generosity.
Now, unfortunately, a proposal to raise taxes on churches is probably going to be greeted in American politics as nothing short of Bolshevism. But I think Kimes raises an important point. And I would extend the point to note that the income tax deduction is hardly the only tax subsidy we offer to God in this country. State and local governments generally exempt churches (and mosques and synagogues, but realistically it's mostly churches) from property taxes. This not only costs revenue, but it leads to a substantial misallocation of real resources as scarce land is left unavailable for more productive uses. The ups and downs of urban growth have left many churches stranded in what are now core business districts that offer location amenities that would be extremely valuable to a commercial real estate developer but offer little concrete value in the religious sector.
More broadly, you have to consider the tax elasticity issues here not just in terms of inputs but of outputs. If church donations were subject to income taxes and church land were subject to property taxes, this would presumably lead to smaller and less architectually splended churches located in less-pricey areas and perhaps with lower-paid clergy. But would fewer souls be saved? Would an angry God blight are crops?
The answers are no and no. The flipside is that churches presumably would respond in part by providing marginally less in the way of social services. But the low elasticities are relevant here. The cost of those reduced church-provided social services has to be weighed against the cost of more dynamic economic growth, and more provision of state services and I don't think it remotely passes the test. Unless, that is, it does anger God and he visits his wrath upon us. But that's the real issue here. Does God care about the splendor of the churches built in his honor and is he prepared to offer us tangible rewards in exchange for subsidizing them? If so, it's a no-brainer. But if not it's an awfully wasteful policy.