From “Grand Bargain and the Charitable Tax Deduction: What the White House Doesn’t Understand” by Howard Husock, Forbes
The whiff of a so-called grand bargain to address the looming combination of long-term federal budget deficits and ever-growing entitlement costs is back in the air, thanks, in part, to what Bloomberg’s Lisa Lerer and Kathleen Hunter have described as President Obama’s “charm offensive,” including dinner with members of the other political party. “With $1.2 trillion in spending cuts mandated over the next nine years and short-term government funding set to expire on March 27,” they write, “lawmakers say the coming weeks could provide the chance for a long-term deficit-reduction bargain that has eluded Congress and Obama.” It’s clear, however—as reported by the Chronicle of Philanthropy—that the White House will continue to push for such a bargain to include new limits on the value of the charitable tax deduction. Indeed, new Treasury Secretary Jack Lew testified, during his Senate confirmation hearings, that capping charitable deductions at 28 percent of their value, even as the top marginal income tax rate rises to 39.6 percent, should be part of “an even-handed approach” to tax reform—which would limit the value of all itemized deductions. (Lew’s testimony was first highlighted in a press release issued by The Philanthropy Roundtable.)
It’s not impossible to imagine a tax regime in which deductions would be sharply limited—as part of a broad push to simplify the tax code, coupled with lower spending and lower rates, in order to spark significant economic growth. It is growth and prosperity, after, all, which are the true lifeblood of philanthropy. But the administration’s persistent push for the 28 percent cap on the value of charitable gifts—it has been advocating for such a change since taking office, long before talk of any grand bargain—raises serious questions about its understanding of the value to American society of philanthropy and the nonprofit organizations it supports.
The most obvious—but not the most fundamental—question about reducing the value of the charitable tax deduction is that of its effect on overall charitable giving. For the administration, the impact is likely to be modest, thanks to the fact that, as Secretary Lew has put it, “only a small fraction of taxpayers—married couples with incomes in excess of $250,000 and single taxpayers with incomes in excess of $200,000—would be affected by the proposal.” Charitable giving, “by non-itemizers and taxpayers with income below these thresholds,” Lew notes, constitute “the vast majority of donors (and) would not be affected by the proposal.”
Lew is right as far as he goes—but fails to note that the select group of donors who would be affected provide a disproportionate share of all charitable giving. Specifically, those with incomes of $250,000 and higher, although they comprise just 6.8 percent of total itemizing donors, contributed fully 35.8 percent of total itemized giving, or $61 billion, in 2010. That, in turn, was almost 30 percent percent of all charitable giving by individuals, and a significant share of the $286 billion in charitable giving from all sources in 2010 (including individuals, corporations, and foundations). That there will be some reduction in charitable giving by the affluent is highly probable. Indeed, Indiana University’s Center for Philanthropy has previously estimated that capping the charitable tax deduction’s value at 28 percent—even when the top income tax rate was 35 percent—would lower giving by 1.3 percent, or some $2.7 billion in 2010. That’s money that would otherwise have gone to soup kitchens, museums and college scholarships which will instead flow to Washington, its purposes to be decided by politicians. Capping the deduction even as the top income tax rate rises is playing with fire—the decline in giving could be even greater.
Indeed, that’s the essential logic of the administration’s long-held position that the value of charitable gifts be cut back: that government can put the money to better use. That, after all, is what “increasing revenue” ultimately means. But results of federally-funded social programs which require individualized attention—such as Head Start and job retraining—have been disappointingly mediocre. What’s more, perhaps the most prominent effort showing promise—the Harlem Children’s Zone “cradle to college” initiative for disadvantaged African-Americans, which the White House itself has singled out for potential replication—has been predominantly supported by private charitable giving. Indeed, its founder Geoffrey Canada, has gone so far as to say he found government funding to be less desirable than private support because of the strings that came with it. Says Canada, “Government funded in cycles, they would give you a certain amount of restricted money to do these very restrictive activities and I found it to be a stranglehold. I couldn’t save kids. I got money for kids five to 12 and if their 14-year-old brother came in, I couldn’t feed them.”
It has become axiomatic that a free market economy is the best path to prosperity. But a free market in philanthropy is a key complement. Tilting the tax code against charity—absent a far more thorough-going change in the whole tax system—is, in essence, another bet on central planning, in this case on social programs designed by Washington. Indeed, there are increasing calls for the charitable deduction not only to be limited in value but reserved for select types of giving, judged to help the poor. Free market philanthropy, in contrast, allows for a variety of competing types of programs to emerge, for donors to learn what works—and to encourage the nonprofit organizations they support to adopt those approaches. That could—and should—happen more, but we can be sure it won’t happen if Washington were running the show. In contrast to farm subsidies and the mortgage interest deduction, philanthropic donors do not, by definition, benefit materially or individually from their gifts. Including the charitable tax deduction in a grand bargain tax cap would fail to recognize the fundamental difference between special interests and philanthropy.
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