Thursday, February 26, 2009

Could Obama's Tax Plan Hurt Charitable Contributions?

According to the New York Times and other sources, part of Obama's plan to pay for his health care initiative involves limiting the availability of itemized deductions for taxpayers with over $250,000 in income (probably we mean adjusted gross income for this purpose, though that detail is still murky). This means that the value of itemized deductions will go down for these taxpayers, and one of those deductions is the charitable contributions deduction.

Many academic studies have concluded that there is considerable elasticity of demand for charitable contributions by the wealthy - or in English, that means that the wealthy in fact respond to tax incentives for donations. If the after-tax cost of charitable giving goes down, the wealthy give more; if it goes up, they give less. Admittedly, these studies vary in predicting the effect of tax changes on charitable giving, and they are all based on statistical analysis and computer modeling from trends observed at times when the economy differed from what we have now. But I think most economists and academics who study the matter would agree that increasing the after-tax cost of donations will have some negative effect on charitable giving, and given the state of our economy and the pressures on charities already, any negative effect may be a bad idea. (Note that there is a counter-argument: some would argue that the tax benefits we give to the wealthy for charitable contributions gives them a disproportionate advantage in shaping the policies of charitable organizations and that in fact tax policy should reduce the tax incentives for giving by the wealthy to avoid having the wealthy monopolize charities).

On a broader note, many tax policy folks (me included) have serious qualms about targeting itemized deductions en masse as a method of raising taxes. At its simplest, I prefer more transparency - if we want to raise taxes on the wealthy (which, by the way, I happen to think is a splendid idea, given that the wealthy have literally made out like bandits from the tax policies of the past 8 years or more and that the distributional inequality of our societal wealth has grown exponentially over that time), then let's just raise the marginal rate, which affects everyone in that tax bracket relatively equally, instead of attacking itemized deductions, which will result in a varied effect depending on how big a given taxpayer's itemized deductions are. For example, if I have $500,000 in adjusted gross income and make a charitable contribution of $100,000, my taxable income after the deduction is $400,000 and I would presumably pay the same amount of tax as someone making $400,000 and making no charitable contributions. If we raise the marginal rate, both of us end up paying more. If we disallow the charitable contributions deduction, then I end up paying more (because my taxable income now rises to $500,000), but the guy making no charitable contributions pays the same. In effect, what we've done is raise the tax rate on just charitable contributions with this strategy. Now if we really think a deduction for charitable contributions is bad public policy to begin with, well, OK . . . then let's just end it. For example, a number of tax policy experts feel that the deduction for home mortgage interest causes us as a society to over-invest in housing (particularly really-big houses), and should be ended. I agree. So fine. Let's end it. But let's not sneak tax increases through the back door without examining the underlying policies for the deductions in the first place. Better to just raise marginal rates.

(Hat Tip to Harvey Dale)

JDC

UPDATE: Politico.com reports that Peter Orszag was asked specifically about the effect of the budget on charitable contributions at today's press briefing, and he opined that people contribute to charities "out of benevolence," not out of desire for a tax write-off. I think this is a bit disingenuous - as I noted above, it may be true that the tax proposals won't have a huge effect on charitable contributions, but to argue that people don't respond to tax incentives on this issue is against the manifest weight of the academic literature.

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Comments

"the wealthy have literally made out like bandits from the tax policies of the past 8 years or more and that the distributional inequality of our societal wealth has grown exponentially over that time)"

Excuse me?! What exactly is Social Wealth?
Capitalism exists BECAUSE of "Distributional Inequality" as you call it ... I call it "Keeping what I've worked for".
If you'd like to equally distribute YOUR social wealth, I suggest you move to a communist country.

Posted by: Mark Edwards | Feb 27, 2009 6:20:26 AM

Friends and internet neighbors,
Re: February 26, 2009, article, "Obama's plan to pay for his health care initiative" is stabbing charitable organizations in the back.
I have no ax to grind; I am unemployed; I have no guile to the poor nor the upper classes; the freedom, religion and liberty of capitalism are preferable to socialism, whether you call those dictatorships communism or monarch.
For the contributor to the charitable organization, the model used of 400,000.00 as gross income is his protection when he has given 100,000.00 to the charitable organization from a business collection of 500,000.00.
If the 100,000.00 that he gave to the charitable organization is chargeable in his taxes for an amount totaling to 500,000.00 income, then he is taxed for money from which he has acquired no benefit and in his own acts of administering that business he is charitable already in performing on his own the expense of acquiring this fund in trust for someone other than himself for the betterment of our shared public environment; and is attacked with involuntary servitude, for the 100,000.00 he has given to the charitable organization to have a fund to perform their ministry to the need of private and public welfare in person, property and rights; and also then "Obama's plan to pay for his health care initiative" is stabbing charitable organizations in the back; and as ‘the power to tax is the power to destroy’ the "Obama's plan to pay for his health care initiative" is denying human charity and the plan can not be called care in health or otherwise executive protection of Americans.
And we do not live under a king, but with a law in our legislature where the civil law and power is to be superior over the executive; therefore, as a people, in our legislature and otherwise in each of us among our neighbors, we should examine and or limit this plan so as to error on the side of not limiting human charity.
I do hope such a plan as this, "Obama's plan to pay for his health care initiative" is stabbing charitable organizations in the back, will not be implemented and will have public concerns leveled against them who are working against public human interest such as this.
Faithfully,
Steve Bilyue'
1corxi19mn@gmail.com

Posted by: Steve Bilyue | Feb 27, 2009 9:53:33 AM

If Obama's tax reform plan removes charitable contributions as a tax deduction, is the government prepared to make up for the losses of money to cancer research or other medically necessary research, to the Red Cross or Salvation Army, for the work they do to help the unfortunate, and to churches, who fill in to help in their local communities when the Feds are too slow to respond (there are still too many homeless residents in Galveston, almost a year after Ike)? If Obama really is for smaller government, then this deduction is one small way Americans can individually choose worthwhile projects to support, instead of giving it to the government for Feds to squander. To think this will not effect charities is obviously political propoganda.

Posted by: Ava | Feb 28, 2009 9:17:56 AM

What happens to those who have worked very hard all these years to try and make the American Dream become a reality? The Small Business Owners...
We who contribute to the community and serve others?
We who support not only our families but our employees' families?
Will our missions to serve others be stopped? Our growth potential be stifled with this tax plan?
It would be great if more clarity existed with whether the 250k benchmark was based on gross, adjusted, or taxable income...which is it?

Posted by: ML | Mar 1, 2009 6:41:59 AM

I get up crazy-early very often, stay up past 3am a few times a week, and work very hard to run my company. My company produces great results contributing to ingenuity and it creates a few good paying jobs. I'm part of that tiny percentage of the population who pays a disproportionate amount of the taxes. And now I'm targeted, vilified and punished for it.

For me, it has come as a great blessing. I've scaled back, layed off, cut back the hours and enjoyed my family time more. If producing is punished, then I'll just kick up my heels a bit and do the best I can without worrying about getting ahead or building something new.

In short - I think me and my family will be fine. We'll fall back into that category of people who don't deserve to be punished and abused for accomplishing. In the process, a few others will fall back into the category of people who will live off government hand-outs. I guess it's a win-win.

Posted by: Ken | Mar 1, 2009 5:30:40 PM

"the wealthy have literally made out like bandits from the tax policies of the past 8 years or more and that the distributional inequality of our societal wealth has grown exponentially over that time"

1. "tax: charge against a citizen's person or property or activity for the support of government"

Seeing as a "tax" is a charge against a citizen's (in this case) property, how, pre-tel, does the removal of a charge against a citizen's property equate to "making out like a bandit"? Or perhaps you would have prefered those taxes to, say, be reinvested into government funded educational facilities to promote more "very important research", which draws such progressive conclusions as "Taking less of someone's money is the same thing as taking from the rich and giving to the poor"?

But hey, whatever secures the votes needed to ensure the government needed to keep your tenure and pension, right? Without which, there wouldn't be the security that accompanies the artificial, detached, leech-like world of state funded acadamia...

Posted by: Alex | Mar 4, 2009 2:50:29 PM

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