Fiscal Policy: President Obama defends his plan to cut the tax deduction for charitable contributions. America is the most charitable nation on earth. Now the government sees charity as a tax dodge.
We have reached a sad state of affairs when charitable giving has become an issue of class warfare. If people in the upper brackets get more of a break because they earn more, they also pay taxes at a higher rate because they earn more.
In recent years the tax code has been used as carrot and stick to encourage and discourage behavior, not as a means of raising revenues, but as a tool for social engineering. Through subsidies — excuse us, “investments” — we want to encourage or incentivize certain activities? Why wouldn’t we want to incentivize charitable giving in tough economic times?
At his Tuesday press conference, President Obama once again invoked the issue of fairness in defending his plan to cut the tax deduction for charitable giving for the “rich.” It isn’t fair, he said, that a bus driver making $50,000 a year could deduct a $100 charitable contribution at a 28% rate but that the president could deduct it at a 39% rate.
Of course, Obama gets taxed at that 39% rate. Actually it’s lower than that now, but we’re using his words and the point is the same. Is that also unfair? He can also afford to give more. To the homeless shelter that $100 is given to, it doesn’t matter whether you are contributing out of goodwill or on the advice of your tax preparer.
White House budget chief Peter Orszag earlier wrote on his blog:
“If you’re a teacher making $50,000 a year and decide to donate $1,000 to the Red Cross or United Way, you enjoy a tax break of $150. If you’re a Warren Buffett or Bill Gates and you make the same deduction, you get a $350 deduction — more than twice the break as the teacher.”
A Buffett or Gates donation is likely to have a few more zeroes added to it at the end. Those are the people who can give more and should be encouraged to give more. But think about: Is it fair that more money will now be going to the government than to that homeless shelter or to United Way and the Red Cross?
Orszag counters that when the top income-tax deduction for charitable contributions was lowered between 2002 and 2003 from 38.6% to 35%, charitable contributions rose. But the top tax rate was also reduced to 35%, increasing after-tax income. When people are allowed to keep more, they give more.
The White House estimates this change in tax policy will yield $318 billion in revenues over 10 years. How much of that money could and should go to charities rather than to a government whose war on poverty has been one of the greatest boondoggles of all time?
“It’s not going to cripple them,” Obama said. “They’ll still be well-to-do.” But it might very well well cripple charitable giving despite his reassurances. The Tax Policy Center, a liberal think tank, estimates the Obama plan will reduce annual giving by 2%, or $9 billion. That’s $90 billion over 10 years.
The Center on Philanthropy at Indiana University reports that total itemized contributions from the highest-income households would have dropped almost 5%, or $3.87 billion, in 2006 had this policy been in place.
The lives of needy Americans are being improved by their neighbors through charitable contributions every day. Why the neighbors do it is irrelevant to the good it accomplishes. Charity is best administered at the level closest to those who need it. Local institutions know best how and to whom it should be distributed, and they don’t take quite the cut government does.
Keep the charitable tax deductions where they are or even increase them. Let people spread their own wealth around.