February 27, 2009
It's Begun . . .
Reuters has posted the first of what I'm sure will be many stories about charities' concerns over the effect of Obama's tax plan on donations, a subject I posted about yesterday. But the more I think about this, the more convinced I am that the effect will not be that great. Obama's plan is simply to limit the tax rate applicable to the deduction (and all other itemized deductions) to 28%, not to cap the deduction (e.g., eliminate it over a certain amount). So donors with over $250,000 in income will still get a substantial deduction, just not as much as before - or put concretely, today a $10,000 contribution really costs a top-bracket contributor only $6500, because a $10,000 deduction at a 35% rate is worth $3500 in tax savings. Under Obama's plan, that $10,000 donation now costs $7200. Of course, the worry is that donors will now give only $9300 or so, in order to "make up" for the extra after-tax cost. But econometric studies don't support a "dollar-for-dollar" negative effect on giving, and as I pointed out yesterday, they vary a lot in their predictive models. Moreover, lessons from psychology and behavioral economics tell us that pure math rarely, if ever, accurately predicts behavior due to a variety of other factors (the prestige associated with big gifts, for example) that impact charitable giving. So Peter Orszag is probably right on this one: the actual effect of the change probably isn't going to be much.
So let's not turn this into a doomsday scenario, folks. The truth is, if Obama can fix our health care system, charities as a whole (and everyone else, from GM to the local barbershop) are going to be much better off in the long run.
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Restricting the Charitable Deduction
President Obama’s proposed budget includes increasing the income and capital gains tax bracket on those earning over $200,000 while reducing the percentage of income that can be deducted for charitable contributions, and other itemized deductions such as mortgage interest, to 28%. Combined, the effect would be to raise their tax percentage bracket into the 40’s.
Both tax increases raise ironic issues for the many more affluent who voted for Obama and Democrat Congressmen and Senators, which those who didn’t might enjoy. However, one should expect alliances opposing these tax increases between many Republican and Democrat voters, if for no other reason than self-interest, not to mention the deemed negative economic growth and charitable impacts. I’ll leave the capital gains and housing arguments for now to focus on the charitable deduction.
Obama is focusing on the wrong problem with the charitable tax deduction, besides making matters worse.
The strongest arguments for retaining the present charitable tax deduction are:
• It’s our money, not the government’s, and particularly in a time of increasing taxes retaining any of our money is preferable.
• Most itemized deductions are already reduced by 3% of the amount for single taxpayers by which their adjusted gross incomes is above $75,000 and married joint taxpayers above $150,000, the reduction reaching a loss of up to 80% of the itemized deductions at higher adjusted gross incomes. Charitable deductions are, also, already restricted to 10% of corporate income, 30% of individuals’ if to a private foundation (which contributes to other public charities), and 50% to a public charity.
• Individuals can make better choices and exert better controls over charitable spending than the government.
• Many important functions are funded via the charitable deduction, such as religious institutions, education, veterans organizations, aid to the poor.
• Many of the added government programs on which the higher tax revenues would be spent are unnecessary or wasteful.
The strongest arguments for restricting the present use by the more affluent of the charitable deduction and other itemized deductions are:
• The better off economically are larger beneficiaries of the tax deduction because they are at a higher tax bracket. Although they are also already being taxed for a percent of tax revenues double the size of their proportion of incomes, Obama argues that they should pay even more, to help fund his panoply of major spending increases on programs for which he and Democrats yearn as important.
• Er, can’t think of any others.
This may seem to pretty much seal the case against further restricting the itemized deduction.
However, there is still a separate case to be made in favor of some further restrictions on the charitable tax deduction. Most lay in the realm of more enforcement of the present tax code. In too many cases it is abused. During the Bush administration, enforcement was increased. More is needed and remains to be done. This should be Obama’s focus.
• Some not-for-profit organizations’ executives receive compensation that is unreasonable and excessive, the present IRS Code’s metric. Public embarrassment has caused some to be cut back. The new IRS 990 filing developed during Bush’s administration will further expose compensation practices. It’s an amorphous tax Code metric, but instances grossly over the line are clearer. One should expect the IRS to follow up, especially when public embarrassment isn’t enough. Similarly, many charities spend disproportionate amounts of their income on administration and fund-raising. Some are combining to cut overhead. Others whose spending is out-of-whack to their purpose should face percentage limitations on such functions.
• Current economics is leading to closer contributor scrutiny of which charities merit donations. Similarly, some added information should be made public about some contributors, as many tax-exempt organizations influence US public policies. The new IRS 990 filing provides much added and new information from which to judge charities. Much will be available on the Internet. As the voluntary disclosure of foreign contributors to former President Clinton’s foundation exhibits the potential influence of non-citizens on US public policies, and the refusal of former President Carter’s to disclose, all contributions by non-citizens should be publicly disclosed.
• The IRS Code for tax-exempt, tax-deductible 501(c)(3) public charities is drawn broadly. A tax deduction or exemption on income is not a privilege granted by the government, but a right that can only be legally circumscribed. Still, when government spending is increasing and taxes increased, it is reasonable to re-examine which income is to be taxed. The IRS Code does not require major percentages of charities’ income to be spent on their purported purpose. Further, many organizations receiving the public charity designation are spending for purposes either distant from their ostensive “charitable” purpose, or possibly less needed in the face of other needs. Many not-for-profit hospitals do not provide appreciably more care to the poor. Many educational organizations are thinly veiled partisan political fronts. Many that purport to aid the poor are targeted at aiding a political party’s ends. The IRS explanation of the present Code, below, http://www.irs.gov/charities/charitable/article/0,,id=175418,00.html should be tightened to reduce or eliminate veiled political party advocacy, is aimed at the poor to require that a significant proportion of spending is upon those in financial need, or to curtail edifices in excess of clear need.
“The exempt purposes set forth in section 501(c)(3) are charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. The term charitable is used in its generally accepted legal sense and includes relief of the poor, the distressed, or the underprivileged; advancement of religion; advancement of education or science; erecting or maintaining public buildings, monuments, or works; lessening the burdens of government; lessening neighborhood tensions; eliminating prejudice and discrimination; defending human and civil rights secured by law; and combating community deterioration and juvenile delinquency.”
If President Obama is really serious about all paying their fair share of increased taxes, he should direct his attentions to this sphere. There’s tens to hundreds of billions of annual tax revenues that might be collected. Oh, according to the Center for Responsive Politics analysis http://philanthropy.com/news/updates/index.php?id=6142 done at the request of the Chronicle of Philanthropy, of political donations from the staff at the 25 wealthiest foundations and 75 of the largest charities, 82% from charity employees and 98% from foundation employees went to Obama and Democrat congressional candidates and political party committees. Republican Senator Charles Grassley has led the fight in Congress to examine and restrict charity abuses. You might encourage him. http://grassley.senate.gov/contact.cfm#emailform
Posted by: Bruce Kesler | Feb 28, 2009 6:52:01 AM