Keep the charitable tax deduction
The economy is in a painful slump. Growing numbers of people need help, charities are facing a decline in donations and states are cutting back on services. The April employment report from the Labor Department will show a further increase in the number of unemployed.
Yet, rather than harnessing the generosity of Americans to help out, President Obama has proposed to reduce the tax incentives for charitable giving. He wants Congress to limit to 28 percent the tax saving from contributions for taxpayers who itemize their deductions.
Mr. Obama proposed to use the revenue gained to fund universal health care. He would make the 28 percent cap on the tax saving for contributions take effect in 2011, when he contemplates letting the Bush 2001 tax cuts for upper-income people expire.
The combination of higher rates and a 28 percent cap on the value of deductions for charitable contributions (and mortgage interest) would diminish donations to charities ranging from local churches to national opera companies. Cutbacks on charitable giving would be more pronounced among the well-to-do, not only because they have more to give, but because their tax rates would rise at the same time as their deductions would be limited.
Mr. Obama’s proposal has resulted in opposition from not only charities, but also Republicans and Democrats in Congress.
According to Senate Finance Committee Chairman Max Baucus, a Montana Democrat: “I’m a little – especially concerned about the 28 percent limitation, which has nothing to do with health care.” And Senate Republican Leader Mitch McConnell said, “Congress should preserve the full deduction for charitable donations and look for additional ways to encourage charitable giving, not discourage it.”
Under the law now, if a taxpayer in the 35 percent federal tax bracket gives $100 to charity, he can subtract the $100 from his taxable income, reducing his total tax bill by $35. The after-tax cost of his gift is $65. (Relief from state income taxes might bring the net cost still lower.)
If the value of the deduction is limited to 28 percent, the after-tax cost of the gift rises to $72, and the net result would be diminished giving.
In a March 24 news conference Mr. Obama argued that his change would add fairness to the tax system because the tax saving for those in the 33, 35 or 39 percent brackets should not exceed the saving for people taxed at 28 percent.
Research has shown that charitable contributions are price sensitive, and the gifts of higher-income taxpayers are more sensitive to price than are the gifts of those lower on the income scale, according to George Washington University economics Professor Joseph Cordes. So reducing tax savings will shrink giving, hurting recipients.
In 2007, Americans gave $306 billion to charity, with 88 percent coming from individuals and the remainder from foundations. As a percent of GDP, Americans are the most generous in the world, giving twice as much as the British and over 10 times as much as the French.
Without undiminished deductions, the government would gain billions in tax revenue, but charities and others would lose. That would lessen the ability of charities to help the neediest, not what the president intended.
In fact, on February 5, in an executive order expanding the role of President Bush’s Office of Faith-Based Initiatives, Mr. Obama stated that “few institutions are closer to the people than our faith-based and other neighborhood organizations. It is critical that the Federal Government strengthen the ability of such organizations and other nonprofit providers in our neighborhoods to deliver services effectively.”
But tax policies that move funding from charities and towards the government would hurt those organizations that Mr. Obama wants to help. The full deductibility of charitable deductions enhances our national generosity, and we should leave that tax provision alone.