Charity Begins At Home

Even as the economy is in a painful slump and growing numbers of newly-unemployed people need help, charities are facing a decline in donations and states are cutting back on services for the needy.

Yet President Obama has proposed to reduce the tax incentives for charitable giving. He wants Congress to limit to 28 percent the tax saving from contributions (for taxpayers who itemize their deductions).

The revenue gained would fund universal health care, Mr. Obama proposed in his March budget. He would make the 28 percent cap on the tax saving for contributions take effect in 2011, when he contemplates letting the Bush 2001 tax cuts for upper-income people expire.

The combination of higher rates and a 28 percent cap on the value of deductions for charitable contributions (and mortgage interest) seems certain to diminish giving to charities, religious institutions, anti-poverty groups, universities, health research, and the arts. Cutbacks on charitable giving would be more pronounced among the well-to-do because their tax rates would rise at the same time as their deductions would be limited.

Mr. Obama’s proposal has resulted in unusual agreement between charities and Republicans and Democrats in Congress: all are opposed.

Rabbi Shmuel Herzfeld of Washington D.C.’s National Synagogue told me in a telephone conversation, “The people who are going to be hurt most are the poor people who benefit from charities. There has to be some better way of getting money for health care than from the charities.”

According to Senate Finance Committee Chairman Max Baucus, a Montana Democrat, in a hearing on March 4, “I’m a little – especially concerned about the 28 percent limitation, which has nothing to do with health care… I’m wondering about the viability of that provision.”

Senate Republican Leader Mitch McConnell of Kentucky said, “This plan to disincentivize charitable giving is wrong. And many of us on both sides of the aisle will be working hard to make sure it doesn’t become law. Congress should preserve the full deduction for charitable donations and look for additional ways to encourage charitable giving, not discourage it.”

Under the law now, if a taxpayer in the 35 percent federal tax bracket gives $1,000 to charity, he can subtract the $1,000 from his taxable income, reducing his total tax bill by $350. The after-tax cost of his gift is $650. (Relief from state income taxes might bring the net cost still lower.)

If the value of the deduction is limited to 28 percent, then the after-tax cost of the gift rises to $720. The net result will be diminished giving.

In a March 24 news conference Mr. Obama argued that his change would add fairness to the tax system. He said, “When I give $100, I’d get the same amount of deduction as when some, a bus driver who’s making $50,000 a year, or $40,000, gives that same $100. Right now he gets…to write off 28 percent. I get to write off 39 percent. I don’t think that’s fair.”

No matter that the bus driver would be in the 15 percent tax bracket if married, and the 25 percent bracket if single, the president’s point is that the tax saving for those in the 33, 35 or 39 percent brackets should not exceed the saving for people taxed at 28 percent.

Research has shown that charitable contributions are price sensitive, and the gifts of higher-income taxpayers are more sensitive to price than are the gifts of those lower on the income scale, according to George Washington University economics professor Joseph Cordes. So shrinking tax savings will curtail giving, especially for health, education, and the arts.

In 2007, Americans gave $306 billion to charity, of which 88 percent came from individuals, and the remainder from foundations. That makes us the most generous nation in the world. As a percent of GDP, we give twice as much as the British, and over ten times as much as the French. The tax code plays a major role in this generosity.

Without undiminished deductions, the government would gain billions in tax revenue, but charities and others would lose. That would lessen the ability of charities to help the neediest, not what the president intended.

In fact, on February 5, in an executive order expanding the role of President Bush’s Office of Faith-Based Initiatives, Mr. Obama stated that “few institutions are closer to the people than our faith-based and other neighborhood organizations. It is critical that the Federal Government strengthen the ability of such organizations and other nonprofit providers in our neighborhoods to deliver services effectively.”

But tax policies that channel funding away from charities and towards the government would hurt those very institutions that Mr. Obama said he wanted to help. The full deductibility of charitable deductions enhances our national generosity—let’s leave that provision alone.