March 7, 2009
(c)(3) Engaged in Campaign Intervention via (c)(4), IRS Rules
In Technical Advice Memorandum 200908050 (Feb. 20, 2009), the Service concluded that a (c)(3) that shared its website with its affiliated and controlled (c)(4) engaged in campaign intervention because the (c)(4)'s pages (contained on the (c)(3)'s website) endorsed a politcal candidate. The (c)(3) complained that the Service was changing the rules by attributing the (c)(4)'s endorsement to the (c)(3), even though the the (c)(4) paid the allocated costs of the pages on which the politial endorsement appeared. One of the obvious problems the (c)(3) could not overcome was that its logo appeared on all website pages, even those pertaining to and paid for by the (c)(4). The Service rejected the (c)(3)'s assertion that the appearance of its logo on the (c)(4)'s candidate endorsement pages was required by its website operator. This seems a pretty easy case; unfortunately, the TAM is only marginally helpful to the question of campaign intervention via websites or affiliated organizations because, as with all technical advice memos, names are deleted and readers are unable to see the offending website.
March 6, 2009
Is There Trouble On The Horizon - Secretary Geithner Hints That Maybe The Administration Will Reconsider Limiting The Charitale Tax Deduction in the Proposed Budget
The Wall Street Journal reported yesterday, March 5, that:
President Barack Obama is meeting strong Democratic Party resistance to his proposal to reduce tax deductions enjoyed by upper-income Americans and could be forced to drop or modify the idea.
Mr. Obama in his budget blueprint last week proposed a cap on itemized deductions for mortgage interest and charitable donations to help pay for his health-care overhaul. The plan would cost wealthier taxpayers about $318 billion in new taxes over 10 years, according to government estimates.
But after objections from Democratic lawmakers, Treasury Secretary Timothy Geithner appeared to suggest at one point Wednesday that the administration was willing to consider dropping or modifying the proposal.
The article goes on to suggest that the strong opposition to President Obama's tax proposals might signal that the balance of the proposals might face stiff opposition even from his own party. A commenter to this article on the Wall Street Journal website credited President Obama with revealing the hypocrisy in his own party (but in a positive way). The commenter suggested that Democratic members of Congress had wealthy contributors, too, and were concerned how the proposals might impact future contributions.
For the full article, please click here.
Update - Possible Settlement in the Feed The Children Court Battle
We blogged early yesterday, Thursday, March 5, that the national relief charity, Feed The Children, was currently embroiled in a battle between the founders of the charity and several board members. It was later reported in The Oklahoman that same day that a settlement is likely in the dispute. It seems like the recession could have hurried all sides to the table for a quick settlement. The suit was just filed on January 30, 2009. The founder, Larry Jones, in the earlier report of the dispute, expressed concern that fundraising initiatives of the board members had been unsuccessful and that he wanted to get back to what he does best, raise money for the charity’s purposes. Below is an excerpt of the most recent story in The Oklahoman.
The legal fight for control of Feed The Children may be decided by a settlement.
. . .
"The hearing ... has been postponed. The previous order remains in place, which allows Larry and the rest of the organization to continue carrying out their mission during this time,” said Jim Webb, an attorney for Jones and his wife. "The postponement provides necessary time to review the issues in this case."
For the full story, please click here.
March 4, 2009
In the Name of Governance, Board Members and Founders of One of the Largest Antipoverty Charities Battle it Out in Court
The Chronicle of Philanthropy reports on yet another Court Battle at a nationally ranked charity, Feed the Children. Just Yesterday, we posted a story about another nationally known relief charity, The Angel Food Network, that is also struggling under the weight of turf wars/lawsuits between its founders and board members. At the heart of both of these stories, there is a closely-held, family run charity. The founders are deeply connected to the charities through founding the charity, legacy and passion. That the IRS requires diverse boards of a reasonable size and is starting to emphasize good governance is possibly threatening to the founders of a closely-held family charity. And yes, Feed the Children is the charity you often see advertised on late night TV or the equivalent. The founder, Larry Jones, is known for his emotional appeals on behalf of impoverished children in the United States and abroad.
If you listen to both sides, both sides sound reasonable. The founders in this case, Feed the Children, argue that the Charity's mission is being hampered by the unnecessary imposition of cumbersome committees that aren't working or fast enough, and the board members argue that the founders are taking liberties (i.e., making decisions without board input, and even at times, against board advice). Governance and transparency continue to be important topics for nonprofits, and increasingly so in these recessionary times. Below is an excerpt of the story. If you would like to read the full story, please click here.
A bitter court battle over the control of Feed the Children, one of the nation’s biggest antipoverty charities, reveals an organization in turmoil and a power struggle that pits the group’s founder, Larry Jones, against his daughter, a top official who was fired in December, according to documents filed in the case.
. . .
Feed the Children, a charity in Oklahoma City, provides food, clothing, medicine, books and other supplies and services to needy children and families in the United States and overseas. It ranks No. 7 on the most recent Philanthropy 400, The Chronicle’s list of the charities that raise the most each year from private sources. Feed the Children reported raising more than $932-million in cash, products, and other donations in 2007.
Board Members Go to Court
Controversy at the 30-year-old Christian relief organization became public when five members of the Board of Directors who were fired in December went to court to claim that they had been improperly replaced. The five, who have been at least temporarily reinstated by a court, said they had been removed just before a board meeting at which several members planned to discuss placing Mr. Jones on sabbatical.
. . .
A countersuit filed on behalf of the five new members, all of whom are Christian ministers, said that “documents gleaned from corporate computers reveal” that the fired board members “were, in fact, recruited into an attempted and unjustified clandestine mutiny by one or more salaried employees who hoped to oust Mr. Jones from the organization that he founded.”
. . .
Court papers show that in December, the revised board fired Mr. Jones’s daughter, Larri Sue Jones, vice president and general counsel. Also removed were the chief financial officer, Christy Tharp; chief operating officer, Travis Arnold; and an internal auditor, George Stevens, who also was a non-voting board member.
The reasons for the dismissals, according to court papers filed in the countersuit, included alleged failure by these employees to dutifully implement, as had been repeatedly directed, substantially any of the suggestions of the auditors that related to subjects other than placing restraints upon the powers and authority of Larry Jones.
. . .
Minutes of a meeting of the revised board make clear that Mr. Jones had felt hamstrung by committees that board members had formed earlier in 2008 to handle the organizations business. The board had created an executive finance committee and an executive hiring committee and had plans for an executive human-resources committee and a temporary committee to review the charity’s organizational structure.
Dr. Jones with much sorrow explained he did not understand why over the last six months the ministry had not been focused on feeding children, said the minutes, which were taken by Mr. Jones’s wife, Frances Jones, the charity’s co-founder who now serves as executive vice president and secretary. All Dr. Jones and Frances could do was beg for help and attend committee meetings as their hands had been tied from doing anything or moving forward to provide assistance to needy children,the minutes said.
To read another account of this story in a local paper in Oklahoma City, please click here.
It Seems like the Automaker Ceos Are Not the Only Ones Getting Attention for Flying High.
CBS News Reports today that Educap, a multibillion-dollar charity is under investigation by the IRS and Congress for certain alleged abuses. Among the abuses, the Charity is having to defend against allegations that it misused charity funds by to transporting Politicians, family friends and others to faraway and exotic destinations aboard Educap's $31 million luxury jet. It is suggested that the nonprofit could have used those funds to assist students instead. See the excerpt of the story below.
(CBS) Educap is a multibillion-dollar student loan charity run by CEO Catherine Reynolds. As CBS News Investigative Correspondent Sharyl Attkisson reported Monday night, Educap is under investigation by the IRS and Congress for alleged abuse of its tax-exempt status because it charges high interest on charitable student loans, and provides lavish perks with millions in compensation for Reynolds and her husband.
CBS News has obtained exclusive details of what may have been the biggest charity perk: use of Educap's $31 million luxury jet, which costs thousands of dollars an hour to operate.
Investigators say for five years, Reynolds jetted friends, family and luminaries to faraway and exotic destinations that sometimes had little to do with the charity's mission.
CBS News has learned that high-profile names on the Educap flight list include CIA Director Leon Panetta, former Sens. Tom Daschle and Ted Stevens, former FBI Director William Sessions and Chicago Mayor Richard Daley.
. . .
Watchdog Stephen Burd says money spent on the jet comes off the backs of students, who have Educap loans costing up to three times more than government loans.
Attkisson asked Burd if he thought Educap was acting like a for-profit company operating as a charity.
“Exactly,” said Burd, of the New America Foundation. “Educap is the worst case that I’ve seen of a charity - a so-called charity - abusing its tax-exempt status.”
For the full story, please click here.
Troubles for the Angel Food Network Deepen
Tioni King, now Tioni Barish, alleges in her federal suit filed Friday that Andy Wingo, son of founder Joe Wingo, made numerous physical advances toward her, e-mailed her nude pictures of himself, took her on company trips, gave her $3,550 worth of furniture, cash and a job, and threatened her job and others’ jobs for not accepting his advances in 2007. The nonprofit fired her.
. . .
Her suit also names the nonprofit’s associated businesses, and Joe, Linda and Wesley Wingo, the family that runs the organization.
Edward D. Buckley, King’s Atlanta attorney, said he was unaware he filed the case the same day that two board members of the nonprofit also filed a state suit, trying to bar the four Wingos from the organization’s business.
. . .
Also, the FBI and IRS searched the nonprofit’s offices last month. Agents refused to say what they were looking for, but a statement from Angel Food says the investigation is into “alleged financial irregularities” of individuals there.
Buckley said Tuesday before noon that he did not know if the Wingos were aware of the sexual harassment suit.
For the full story, please click here.
IRS Issues Winter 2009 Statistics Of Income Bulletin
Yesterday, the IRS issued the winter 2009 issue of the Statistics of Income Bulletin. Below is a portion of the text:
WASHINGTON —The Internal Revenue Service today released the winter 2009 issue of the Statistics of Income Bulletin, which features information on 138.4 million individual income tax returns filed for tax year 2006. Of those returns, about 93 million, or 67 percent, were taxable, which means that the taxpayer reported total income tax greater than zero. The total number of taxable returns in tax year 2006 was up 2.4 percent from 2005.
Adjusted gross income on these 93 million returns totaled more than $7.4 trillion, which was up 8.5 percent from 2005. Total income tax on these returns totaled approximately $1 trillion, up 9.5 percent from 2005. (Adjusted gross income is total income, as defined by the tax code, less statutory adjustments - primarily business, investment or certain other deductions.)
The average tax rate for taxable returns was 13.8 percent, an increase of approximately 0.2 percentage points from 2005.
Taxpayers in the top 1 percent of adjusted gross income reported adjusted gross income of at least $388,806 in tax year 2006. This group accounted for 22.1 percent of all adjusted gross income for 2006, up 0.9 percentage points from the prior year. This group also accounted for 39.9 percent of the total income tax reported, an increase from 39.4 percent in 2005.
Taxpayers in the top 5 percent of adjusted gross income reported adjusted gross income of at least $153,542. This group accounted for 36.7 percent of adjusted gross income and 60.1 percent of total income tax.
The Bulletin also includes articles on the following:
. . .
- Charitable and other tax-exempt organizations reported more than $10 billion in gross unrelated business income for tax year 2005. Between 2004 and 2005, total unrelated business income tax liability increased by 49 percent to $543.3 million. (emphasis added)
. . .
The Statistics of Income Bulletin is available from the Superintendent of Documents, U.S. Government Printing Office, P.O. Box 371954, Pittsburgh, PA 15250-7954. The annual subscription rate is $53 ($74.20 foreign), single issues cost $39 ($48.75 foreign).
For more information about these data, write to the Director, Statistics of Income (SOI) Division, RAS:S, Internal Revenue Service, P.O. Box 2608, Washington, DC 20013-2608; call Statistical Information Services at (202) 874-0410; or send a fax to (202) 874-0964. These are not toll-free numbers.
For the full bulletin, please click here.
National Committee For Responsive Philanthropy Report on Philanthropy Benchmarks: Calls for More Diversity Spending
The National Committee for Responsive Philanthropy recently issued a report entitled "Criteria for Philanthropy at its Best: Benchmarks to Assess and Enhance Grantmaker Impact". While the report makes several recommendations regarding good grant-making practices, most of the attention has focused on the recommendation that private foundations increase their grant-making to "poor and minority populations:"
The pressure to get more philanthropies to help the poor and minority populations has generated the most controversy and comes on the heels of similar advocacy efforts in California and other states. According to three years of giving data from over 800 grant makers, the organization said that only 13 percent of the foundations it examined meet its criteria for giving and that 1 out of every 3 grant dollars benefits “lower-income communities, communities of color, and other marginalized groups, broadly defined.” "This is, frankly, appalling, and it must improve if foundations are going to be relevant to addressing the most important problems facing our nation,” said Aaron Dorfman, the executive director of the National Committee for Responsive Philanthropy, during a press event to announce the standards. He said his organization wants to trigger a debate about how foundations should operate, especially today during a recession when charities and many people are strapped for cash.
. . .
The part of the report that brings up race, diversity and other measures to increase direct spending for poor and minority communities has predictably provoked opposition from some well respected stakeholders:
Several grant makers, including the Atlantic Philanthropies, endorsed the standards. But the Council on Foundations, the Philanthropy Roundtable, and other nonprofit associations oppose them. Given the diversity of philanthropic organizations and causes, “we cannot endorse mandates, or imposed measures that seek to promote a one-size-fits-all approach,” said Steve Gunderson, president of the council, which represents about 2,000 grant makers. The Philanthropy Roundtable, which represents both foundations and wealthy donors, said in a statement: “These benchmarks have nothing to do with measuring effectiveness. In fact, the natural consequence of these benchmarks will be to reduce the scope and diversity of the foundation sector to one that serves a more narrow set of highly politicized interests.”
For further news reporting on the reactions in the nonprofit sector, see this Chronicle of Philanthropy article.
March 3, 2009
Allegedly Controversial Virginia Charity Moved $1 Million to a Related Charity Before Filing for Chapter 11 Bankruptcy Protection
Forbes.com reported yesterday that the National Heritage Foundation, which filed for Chapter 11 Bankruptcy protection on January 28, is said to have moved $1 million to a related charity days before filing for bankruptcy.
In a document filed in court on Feb. 27, NHF disclosed that two days before it filed for bankruptcy protection (link removed), it wired $1 million to Congressional District Programs. This nonprofit shares officers, directors and even a Web site with NHF and is located at the same address. The move left NHF with less than $6 million in cash, against bank loans of $7.5 million, court filings show. An NHF official did not respond immediately to an e-mailed request for comment on the transfer.
NHF specializes in administering donor-advised funds, which operate like mini-family foundations--individual donors make contributions and take their income tax deductions upfront, then dole out the funds to individual operating charities over time. But for years, NHF has been criticized for skirting federal tax laws.
The bankruptcy filing gave NHF a temporary respite from its debts. The action also halted $2 million in yearly payments to holders of charitable gift annuities issued by NHF. Many of those annuitants have filed unsecured-creditor claims with the bankruptcy court (link removed).
For the full story, see click here.
For the earlier story discussing the initial filing for bankruptcy, please click here.
Study Released Today Supports Claims Made in Earlier Posts that Tax Limits on Charitable Deductions Will Cause Minimal Decline in Giving
Suzanne Perry reports in The Chronicle of Philanthropy on a study released today, March 3, 2009, by the Center on Budget and Policy Priorities. This center is a national policy organization that conducts research and analysis at the federal and state levels on fiscal policy and public programs that affect low- and moderate-income families and individuals. According to the center's website, the center works to inform public debates over proposed budget and tax policies with the goal of ensuing that the needs of low-income families and individual's are considered in these debates about the proposals.
Ms. Perry's summary of the report states that the decline in charitable giving because of President Obama proposal to limit the tax breaks would be an estimated 1.3 percent per year and only affect about 1.2 percent of all taxpayers. As a consequence, the
[o]ver all [sic], the effect of the budget proposals on charities is probably a very small negative at worst—and quite likely a net positive," the center, which analyzes the impact of government spending on low and middle-income people, said in a report.
. . .
The center said an analysis by the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, found that the proposal would affect only 1.2 percent of U.S. households, those in the 33-percent and 35-percent tax brackets.
. . .
Furthermore, the center said, the president’s budget proposes keeping the estate tax as it stands, rather than allowing it to be repealed or shrink further, which will operate as "a powerful incentive for charitable giving." (This tax prompts some people to give to charity as a way to decrease the tax liability on their estates.)
For the full story, please click here.
In addition the report provides these reasons why the reduction in giving would be so minimal.
First, a substantial portion of charitable giving derives from foundations, estates, and corporations and from individuals who do not itemize their contributions on their tax returns. Itemized contributions represent only 62 percent of total charitable giving. (footnote omitted)
Second, the proposal would affect only the 1.2 percent of tax filing units that are in the top two income tax brackets. Tax Policy Center data indicate that these taxpayers account for only 18 percent of the charitable contributions that are reported as itemized deductions. Thus, only about 11 percent of total charitable giving would be affected.(footnote omitted)
Reducing the tax subsidy for charitable giving increases the after-tax price of a dollar of contributions. Someone who is now in the 35-percent federal income tax bracket and lives in a state with a top income tax rate of 6 percent pays 59 cents after taxes for each dollar contributed to a tax-exempt charitable organization. Under the proposal, which would limit the federal deduction to 28 percent, that person would face an after-tax cost of 66 cents — an increase in cost of 12 percent. (The increase in the cost of giving would be 8 percent for those in the 33-percent income tax bracket.) Based on research on the effect of tax incentives on charitable giving, this change would be expected to reduce total charitable giving in the U.S. by about 1.3 percent. (footnote omitted)
For the full report, please click here.
The report is consistent with claims regarding the minimal impact of the tax proposal on giving made in numerous posts on this blog last week following the release of the President's budget proposal.
Angel Food Ministry Board Members File Suit; What Should a Faithful Board Member Do?
In another sad development in what promises to be a very sad story, two board members of Angel Food Ministries, about which we reported last week, have filed suit against three of the nonprofit's founders, Joe and Linda Wingo and their son. According to the Atlanta Journal Constitution, "the suit by board members Craig Atnip from Texas and David “Tony” Prather of Georgia, attempts to remove Joe and Linda Wingo and their son Wesley from their controlling positions. Another son, Andy, is a former ministry officer. The suit alleges the Wingos enriched themselves by millions of dollars through sweetheart deals, kickbacks from grocery vendors and using company credit cards to buy personal items." The Wingos called the suit a "power grab" motivated by money in this press release:
The lawsuit filed yesterday in Walton County, Georgia was initiated by two directors who are interested in removing the founders of the Ministry – Pastors Joe and Linda Wingo – only to install themselves in the founders place. This is a power grab plain and simple, and the people of Walton County and those who look to Angel Food Ministries for relief need to understand what and who are actually behind this effort. The essence of this lawsuit aims to wrest control of this $140 million organization that was the brainchild of Joe and Linda Wingo in the years prior to 1994. AFM, a staple in Walton County for 15 years, went from 34 boxes of food in its first month to the six million served across 39 states in 2008. It employs 300 people full time, and had a payroll exceeding $10 million in 2008. As one of the largest employers in the area, it serves as a vital revenue base for Walton County, Monroe and the State of Georgia.
The plaintiffs responded with their own press release, one that sheds light on the inner workings and conflicts that nonprofits -- especially those that experience sudden and staggering financial success -- must experience often. For example, the plaintiffs state that there have been disputes on the board since 2006 over the Wingo's refusal to adopt "IRS recommended good governance practices." One of the plaintiffs, who now serves as CEO but spends most of this time responding to the FBI and IRS according to the press release, reports that he resigned from the Board of Directors over that dispute but rejoined the board only after receivng assurances that "many of the bad practices of the past had been corrected." Sadly, the case will provide fertile discussion of a nonprofit board member's obligations when faced with allegations of mismanagement. Board members faced with these sorts of allegations find themselves in difficult situations. Both state and federal tax law suggest they have an affirmative duty to act but, as this case demonstrates, acting upon that duty can make a bad situation worse, ultimately to the detriment of charitable beneficiaries. Still, there are certain cases when board members must act even if doing so will shed some bad light on the nonprofit. I suppose in really bad cases, a board member might just have to burn down the organization to save it (or him or herself). IRC 4958, for example, seems to impose excise tax liability on board members who affirmatively fail in their obligation to prevent insider siphoning. If nothing else, the record in this case might prevent the imposition of 4958 liability on the board members who complained, even if only quietly. The lawsuit only adds to the record.
International Journal of Civil Society Law - March Newsletter
The March issue of the International Journal of Civil Society Law (IJCL) Newsletter has some very interesting reports on individual freedoms in civil society as they relate to nonprofits, including: citizenship and freedom of information, freedom of association, freedom of expression and freedom of religion. To see the March issue of the IJCL Newsletter, go to http://www.iccsl.org/pubs/09-03_IJCSL-N.pdf
March 2, 2009
As demonstrated last week by the exchange between Professors Colombo and Dale , the nonprofit community is divided over the impact of President Obama's proposal to limit the charitable contribution deduction. OMB Director Peter Orszag even weighs in on the proposal in this OMB blog post entitled "The Budget and Charitable Donations."
Will this hurt charities?The evidence suggests that many factors affect charitable contributions, including the desire to help the charity and overall economic conditions. (The most recent example with changing the tax code illustrates that point. Between 2002 and 2003, the top income tax deduction for charitable contributions was reduced from 38.6 percent to 35 percent – and yet individual charitable contributions rose, presumably because other factors were a more important influence on giving than the change in the income tax.) Furthermore, about 75 percent of overall contributions would not even be affected by the proposed income tax change – because the contributions come from individuals who would not be affected or from corporations or foundations not subject to the individual income tax. Finally, even to the extent that charitable contributions are affected by tax considerations, the budget contains other proposed changes (including retaining an estate tax) which will create stronger incentives for giving. Above all, though, the best way to boost charitable giving is to jumpstart the economy and raise incomes – and the purpose of the Recovery Act enacted earlier this month was to do precisely that.
More evidence of the debate appears in this week's Chronicle of Philanthropy story discussing the reaction amongst nonprofit sector stakeholders:
Independent Sector, the Partnership for Philanthropy Planning (formerly known as the National Committee on Planned Giving) and other nonprofit groups say that limiting the charitable deduction would put a damper on contributions, especially given the bad economy. Even though administration officials have sought to reassure charities that the economy will be better by 2011 when the provision would take effect, some charity leaders think financial conditions could still be rocky.
. . .
But some experts believe concerns about the economic impact of lowering the charitable deduction are exaggerated, and the actual effects of the provision on giving by the wealthy would be relatively modest. “Every time people want to fool around with the tax code, [charities] say it will be the end of philanthropy,” said Bruce Flessner, a Minneapolis fund-raising consultant. “I don’t think it will kill giving.” Using 2006 tax data, the most recent available, Indiana University’s Center on Philanthropy has estimated that giving by high-income households would have been 4.8 percent less if President Obama’s proposed limits on charitable deductions, and increases in taxes owed by the wealthiest Americans were in effect then. Given this analysis, “we feel this budget proposal would not have much effect on whether people give but rather how much they give at the margins,” said Patrick Rooney, the center’s director of research. However, the center said that changes in personal income and wealth, including the condition of the stock market, affect giving more than tax proposals. It noted that every time the stock market declines by 100 points, giving declines by $1.85-billion.
I tend to agree with Professor Colombo's initial point, implicitly if not explicitly made, that no matter what the President and Congress do there will be opportunities for endless nit-picking (in fact, "nit-picking" is probably not the right word because the objections are all quite legitimate). I just think its the tax law equivalent of the NIMBY principle. There is great irony in the whole thing. Nonprofit stakeholders are "redistributionist" as a general matter but now that there is a proposal on the table that might reduce a subsidy that applies to them, suddenly the familiar arguments utilized by those who are strictly non-redistributional are adopted by those same nonprofit stakeholders. But the stock market is sinking like a heavy rock as we speak and we should probably agree not to let the perfect be the enemy of the good. Indeed, every argument made for or against the charitable contribution limitation can be made with regard to every other tax proposal. We need only change the code section to which the arguments are intended and insert whatever other code provision with which we agree or disagree.
March 1, 2009
More on Obama's Tax Plan and Charitable Contributions
Harvey Dale, the University Professor of Philanthropy and the Law at NYU and the Director of the National Center on Philanthropy and the Law, e-mailed me some comments on my most recent post about Obama's tax plan and charities, which I share (with Harvey's permission) below. Harvey is one of the founders of the academic legal discipline of non-profit/tax-exempt organizations, and all of us who blog here at the Nonprofit Law Prof Blog owe our careers in part to Harvey's efforts. He has forgotten more about this subject than most of us know, and so I take his comments very seriously.
I disagree with your most recent post on this, not so much because of what you said but because of what you didn’t say. To be clear: I agree that it isn’t certain that a 28% cap will materially chill charitable giving. I do think it will have some marginal impact, particularly since the wealthiest taxpayers tend also to be the most tax sensitive. I am, however, prepared to leave that question unsettled since we don’t have and aren’t likely to have an “accurate” or even “consensus” price elasticity coefficient. Several other factors, however, leave me strongly opposed to the plan to cap the charitable contributions deduction at 28%:
Complexity: all caps and phase-outs add to complexity in the Code. The currently-proposed caps apply not only to the charitable contributions deduction but also to the deductions for state and local taxes and mortgage interest, and perhaps others. Anyone eligible for any one or more of the deductions must consult not only the principal relevant Code section(s), but also the cap section(s), any other phase-out section(s), etc. The task gets ever more complicated, tax return preparers get lost and make mistakes, etc. We should stand up against complexification.
Horizontal equity: caps and phase-outs almost always create inequalities in tax burden for otherwise similarly situated people. For example, consider Mr. A and Ms. B who are similarly situated, e.g., they are single, self-employed, without major medical expenses, etc. Mr. A has $400,000 of taxable income and gives nothing to charity. Ms. B has $500,000 of taxable income before charitable contributions and gives $100,000 to charity. At the end of the day, both are left with $400,000. But Mr. A will pay less tax than Ms. B. (If she understands this, Ms. B is fairly certain to feel it as a punishment for her generosity. I note also that Ms. B can duck this bullet by rolling over to charity $100,000 from her IRA, and perhaps in other ways too so long as she can avoid assignment-of-income problems.)
Dilution of incentive: even if we abandon the proper-tax-base-defining rationale for the charitable contributions deduction (and I wouldn’t abandon it altogether), all agree that the deduction provides a financial incentive or “subsidy” for giving. It’s already very hard calculate the amount of the subsidy (I doubt that even as many as 5% of donors could figure out what the final amount of the deduction will be given the bizarre, baroque rules in the Code). The more complex it becomes, the less clear the incentive. Would anyone really want to say: “I want to change your behavior in X manner, and if you change it I’ll give you a reward . . . but I won’t tell you what the reward will be.”
Economic efficiency: because of the above factors, caps and phase-outs are guaranteed to increase inefficiency in the allocation of economic resources.
Better alternative: it’s so easy to avoid all of the above problems that it’s hard to see why the cap-or-phase-out path should be followed. It would be straightforward, clear, and courageous simply to increase the relevant tax rates. If there were no other path to tread, we might have to grit our teeth and settle for a cap. But here a little candor and courage would be most welcome. It’s certainly easier to draft and implement a rate increase than caps and phase-outs.
I don't disagree with Harvey's observations - in fact, they are pretty similar to what I said in my original post on this subject. I do think, however, that we ought not to destroy the forest to save a few trees. Reforming health care, investing in education and weaning the country off of imported oil are extraordinarily important public policy initiatives. Every aspect of Obama's plan will be subject to some kind of objection; there will always be a "better" way to do it that doesn't involve the particular stakes of the commentator suggesting the better way. The old saw "Don't tax you, don't tax me, tax the fellow behind the tree" will be seen over and over again in this process (except for the Rush Limbaugh crowd, who as far as I can tell would rather just see government disappear completely, perhaps with the exception of maintaining a standing army). All I ask is that those of us in the charitable/nonprofit community keep our wits about us and remember that the long-term gains from Obama's policy goals may well outweigh the adverse effect on charitable giving and tax simplicity. Charities that have employees will benefit from a rationalized health care system that controls costs; poor-relief charities will be able to devote resources to other pressing needs. And so forth. In economic terms, I've made my Kaldor-Hicks efficiency analysis, and the gain seems worth the potential cost. Your mileage, obviously, may vary.