Obama budget: 20% increase in the so-called ‘charity tax’

Writing in Forbes, the Manhattan Institute’s Howard Husock raises concerns about a component of President Obama’s proposed budget that would narrow tax deductions for charitable giving:

President Obama’s long-awaited budget proposal, to be released today, does not come right out and say that  intends to reduce contributions to charity—but that is almost certainly what would happen were it to become law. Here’s why.

The White House has effectively doubled down on a tax change it has been pushing for four years that would limit the value of the charitable tax deduction. The Administration has, since 2009, pushed unsuccessfully to allow only 28 cents on a dollar donated to charity to be deducted—even though the top tax rate for the wealthy donors who make most use of the deduction has been 35 percent.

In the budget released today, the President again proposes to cap the charitable deduction at 28 percent—despite the fact that the top rate on the highest earners has increased to 39.6 percent. Think of it this way:  the White House proposal would raise the cost of giving to charity from 60 cents per dollar to 72 cents per dollar.  That’s a 20 percent increase in what can be called the “charity tax.”

When one taxes something more, of course, one gets less of it—and it’s likely that the current $168 billion in itemized charitable giving would decline. 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 $2.18 billion in 2010.

The new proposal would likely take an even bigger bite from giving. The Chronicle of Philanthropy reports that the reduction in giving could be as high as $9 billion a year.

Later in the column, Husock argues that the charitable deduction is different in several important ways from other deductions, such as the home mortgage deduction. He also posits that, without the charitable deduction, big government will increasingly fill the space once occupied by private philanthropy (emphasis added):

Although [the charitable deduction] decreases the tax liability of the affluent, it provides no direct personal benefit that’s the equivalent of a McMansion or gold-plated local schools or parks. It’s true that it leaves more money in taxpayers’ pockets to spend as they wish—but that’s only because of the social benefits their donation is providing, whether in the form of a food pantry or medical research.

Indeed, without saying so explicitly, the Obama charity tax increase implicitly assumes, under cover of “fairness,” that Washington will do a better job spending the money than private donors will. But by encouraging philanthropy, we encourage imagination and innovation—in ways the political process, more likely to be constrained by conventional wisdom, will not.