Some economists say [the nontaxation of charities & donations] can be justified on the basis that taxable income should include only personal consumption and wealth creation, and money given to charity is arguably neither. This was the implicit logic behind the development of deductible donations in Britain in the 1920s, when donors began to covenant part of their income to charities, and thereby avoid paying tax on it.
Rob Reich of Stanford University offers a robust counter to this view. “If a person has legitimate ownership of resources and can rightfully decide how to dispose of those resources, then whatever a person decides to do with those resources—spend it on luxury goods or give it to charity—is, by definition, tautologically, consumption.” It is demonstrably true that people derive pleasure from their donations. They may also earn benefits that are hard to come by through other means and peculiarly prized—social esteem and status, for example. Far from being non-consumption, giving is a particularly high-quality form of personal consumption.The Economist adds that an argument for nontaxation of charities characterizes it as "a form of public expenditure that can be justified on the basis that it secures benefits for society that are worth more than the money which the state forgoes in taxes. For this argument to work, one needs to be convinced that tax breaks actually increase charitable giving." I'm not sure that is what one needs to be convinced of for the argument to work, especially if you think charities can do more with less as compared to government (common market-based argument, no empirical evidence). Rather, I think one needs to be convinced that what individual philanthropists decide to fund is better for society than that which the society itself decides to fund through taxation, a decision that is at least ostensibly the outcome of democratic contestation in the public sphere. To the extent one is also skeptical that democracy is working well, both options are subpar, and then the question is which is less sub-par.
It's really therefore a question of who is going to decide what to support in society. Are private philanthropists going to decide what society needs, or is the public, through its elected representatives, the good, the bad, and the ugly, with the latter two being the more likely, going to decide? If you think politics is hopelessly corrupted by lobbying and moneyed interests, and you are not yourself a lobbyist or moneyed interest and therefore not a philanthropist, then neither choice seems particularly worthy. Or perhaps taxpayer-supported philanthropy wins because the alternative is nothing or close enough to nothing. If you are neither a lobbyist nor a moneyed interest and still believe in democracy, however, then perhaps you come to the conclusion that taxpayer-supported social programs chosen by government are preferable to taxpayer-supported social programs chosen by private philanthropists not because the latter constitutes a subsidy but because the former preserves the decisions for the polity.