Wednesday, October 10, 2012

Charitable Deduction Under Fire

Many people are talking about comprehensive tax reform.   There are lots of different flavors of tax reform,  but the charitable deduction seems to be on the block in most of them.  We all know about the Administration's proposal that would limit the charitable deduction.   It was striking to me that some of the panelists at the recent Ways & Means Subcommittee hearings  felt the need to speak out in a pre-emptive way about the negative effects of tax reform on the charitable deduction.  I don't think this talk is going away any time soon.

Today's article in Bloomberg News outlines the possible impact of the new Romney tax proposal, which also would limit the charitable deduction.  According to this article on CNN, here is the Romeney quote:

You could do something, for instance, as an option you could say everybody's going to get up to a $17,000 deduction, and you can use your charitable deduction, your home mortgage deduction, or others – a healthcare deduction, and you can fill that bucket, if you will, that $17,000 bucket that way. And higher income people might have a lower number," Romney said.

From that quote, all we know is that the charitable deduction is a potential target of an itemized deduction cap, as well as many other deductions of various sizes and costs.   It would be easy to say that maybe this is just a Pease limitation under another name, but the capping of the healthcare exclusion for employer provided insurance would be mostly new (if that's what he meant).  It really isn't clear what else would be in the "bucket."  Certainly it seems like there might be enough other stuff in the bucket that you MUST pay (like your property taxes and your mortgage interest), that things that you COULD pay, such as charitables, would be crowded out IF.. and it's a big IF... you are a tax motivated donor.

If we take the Forbes report from the post I made yesterday to heart, it does appear that many high net worth donors are, at least in part, tax motivated.   They may still give, but they may give less.  My guess is these types of tax reform proposals will impact charitable giving, but it is really hard to know in a vaccuum how signficant those impacts will be.

Who knows if this tax reform stuff is all just talk and none of it will come to pass?  It is easy for the cynic in me to see it all as so much posturing.  But, It is a policy debate worth having - is the tax expenditure cost of the charitable deduction "worth" the private philanthropy that it theoretically encourages?  Is the charitable deduction the same as other deductions, or is it different?  In my personal opinion, which is worth next to nothing, the frustrating thing about both the Obama and the Romney proposals is that they are numerical caps.  They sidestep the hard, subsantive discussions about whether all deductions were made equally by their Creator and therefore should be thrown together in a bucket - maybe, sadly, that's the price to be paid for tax reform, should it happen.

Sorry for the gloom and doom.  I'll try to be more chipper tomorrow.

Yours Despairingly, EWW

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