The Obama Administration’s budget proposal for 2013 would reduce the percentage value of itemized deductions (including the charitable contribution deduction) to 28 percent of adjusted gross income for families with incomes above $250,000, and individuals earning more than $200,000. The tax rate for upper income taxpayers would be raised to 39.6 percent.
The administration pointed out that “there’s still a tax benefit for every additional marginal dollar contributed, so there is still an incentive to keep giving to charities.”
However, it acknowledged that the incentive would be reduced so that, for example, if the taxpayer’s tax bracket was above 28 percent, the tax benefit would remain at only 28 percent. In defending this recommendation, a government spokeswoman said that while a charitable contribution deduction is important, the huge annual benefit (estimated at $50 billion per year) “makes it necessary to consider options for keeping the tax break for charitable gifts in check.”
The Obama vision is flawed because donors make a financial sacrifice with regard to each and all of their charitable donations. The simplest example is an individual in the 35 percent tax bracket who gives $10,000 to a charity. Assuming that the person receives the full $10,000 deduction, there is a $3,500 tax savings. However, the donor’s “net sacrifice” is the amount by which her net worth is diminished through the transaction, in this case, $6,500. If the Obama Administration’s proposal is enacted, the tax saving to the contributor would be only $2,800, and thus the inducement to contribute would be reduced.
Other examples (assuming that the property given is appropriately valued) will be consistent, although the donor’s net financial loss will be less if the donation is of appreciated long-term property. While unused charitable contribution deductions under present law may be carried forward for up to five years, the benefit disappears with death and many donors do not rely on the carryover. The charitable contribution deduction must be contrasted with a “tax credit,” which reduces the tax liability dollar-for-dollar.
A recent study by the Center on Philanthropy at Indiana University reports that the bulk of charitable giving in the United States comes from high-income individuals. The study further indicates that a very significant portion of such individual donations were to education and to the arts. Therefore, if the charitable contribution deduction is reduced for such high net worth individuals, education and the arts will particularly suffer (e.g., private organizations such as universities, independent schools, orchestras, art museums, and the like — many of which are struggling financially, and do not receive significant federal support).
In a recent op-ed piece in the Wall Street Journal, Fay Vincent, the former Major League Baseball commissioner, said: “My God, Obama is going to raise taxes on rich people who give to charity! We’ve got to do something to reduce the awful philanthropic surplus plaguing this country.”
Does not the whole issue come down to which causes to support? Should the decision primarily be made by Congress, or at least, in part, by the donating taxpayer?