Sunday, March 15, 2009

President Obama’s Plan to Reduce the Charitable Deduction

Once in a blue moon, Jupiter is aligned with Mars. Presently,
liberals and conservatives are in alignment over President
Obama’s recent proposal to reduce itemized charitable
deductions. Liberals, who run most of America's non-profits,
and conservatives, who oppose raising taxes, are both opposed
to the president’s proposal.

President Obama’s budget proposal for 2010 includes a
provision to raise the tax rate on the two highest income tax
brackets from 35 % to 39.6% and from 33% to 36% respectively
and to lower the tax benefit from itemized deductions for these
two brackets to 28%. This includes the benefit for charitable
deductions. The money garnered by these changes will be used
to help create a $630 billion fund to be used to fund the
envisioned new health care system.

Non-profits are concerned that this change will cause donors to
give less money to charity. The White House budget chief,
Peter Orszag, responded to this concern by offering the following
example on his blog: “If your’re a teacher making $50,000 and
decide to donate $1,000 to the Red Cross or United Way, you enjoy
a tax break of $150. If you are Warren Buffet or Bill Gates and
you make that same donation, you get a $350 deduction – more
than twice the break as the teacher.” According to the editorial
page of the Wall Street Journal (3/10/09), the administration is
turning “…philanthropy into a class issue.”

Instead of wealth redistribution by choice, wherein a donor
chooses what charity to support, this tax change is a step down a slippery slope toward forced redistribution wherein the
government chooses where to direct one's money As taxes increase and itemized deductions decrease, private citizens will become
acclimated to the notion that it is the responsibility of the state to support the less fortunate; private citizens will gradually become less inclined to support the less fortunate on their own initiative.

Government responsibility for the less fortunate is the method of
philanthropy that is prevalent in a welfare state. The nadir of this
slippery slope is best exemplified by the nations in Europe. In
Europe, very few private citizens give to charity. It is worth
noting that greater than 70% of Americans give to charity.

The Center on Philanthropy at Indiana University just published
an analysis of how changes in the tax rate will impact itemized
charitable deductions. It estimated that had the proposed changes
been in affect in 2006, the total itemized contributions from the
4 million highest income households would have dropped off 4.8%
or $3.8 billion. At the time, these high income tax filers accounted
for $81.2 billion out of a total of $186.6 billion that was claimed by
all tax returns with itemized charitable deductions.

The proposed change in reducing the charitable deduction is not
taking place in a vacuum. It is taking place at a time that the economy, according to Warren Buffet, has fallen off a cliff. It is taking place at a time when there have been mega-changes in personal wealth and income. The changes in wealth and income play a larger role in charitable giving than changes in tax rates. The structural changes in the role played by the government in the economy, as recently engineered by the Congress, may lead to long
term changes in wealth and personal income. These structural changes may create a permanent debt for future generations with concomitant changes in the way Americans support the less fortunate.

What makes Americans give almost $200 billion to charity each year
is not pressure from government mandates, but “…a diversity of
interest, freely chosen and passionately pursued.” (Naomi Riley,
Wall Street Journal op-ed page 3/3/09) In order to prevent the
Europeanization of American philanthropy, conservatives and liberals
must work together in order to keep American philanthropy unique
and effective in supporting the least fortunate throughout the world.

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