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A Tax Break Both Parties Can Agree to Limit

December 11, 2013

It would be fair to say the Ryan-Murray compromise budget announced Tuesday hasn't exactly produced rejoicing in the nation's capital. Democrats generally lament the entrenchment of austerity spending levels for discretionary outlays, including $8 billion in cuts to food stamps and the exclusion of $23 billion in funding to extend long-term unemployment insurance next year for 1.3 million jobless Americans. For their part, Republicans deferred their perpetual campaign to slash Medicare and Social Security and seem to have given up altogether on their mantra of tax reform.
All of which is why both parties should unite in accepting President Obama's proposal to limit the charitable deduction at 28 percent. Estimated to raise $321 billion over the next decade, the cap on the tax break for charitable giving would not only fully fund SNAP and unemployment insurance through 2014, but help offset some of the impact of the automatic sequester process. While the deduction overwhelmingly benefits the richest Americans, recent history and philanthropic forecasting models alike suggest its reduction for earners in the top income brackets would have little impact on overall giving. As for Republicans supposedly certain to oppose the move, 95 percent of them already voted for it three years in a row in the Ryan budget that chops the top income tax rate to 25 percent.

To be sure, groups like the Charitable Giving Coalition oppose the rule change, and have done so since President Obama first proposed it in 2009. The Coalition argues that total charitable giving by Americans, which reached an estimated $316 billion in 2012, could be reduced from between $1.7 billion to $5.6 billion a year. But even that 1.9 percent drop-off forecast by the Center on Budget and Policy Priorities (CBPP) might not come to pass for the simple reason that the overall strength of the U.S. economy--and not changes to marginal tax rates and deductions--is the biggest factor in influencing charitable giving. As Bloomberg and The Chronicle of Philanthropy each reported in 2011, Obama's proposal would likely have little to no impact on charitable giving. As Bloomberg noted, an adverse impact is far from a given:

Not necessarily, say tax and philanthropy experts. They say altruistic or religious motives outweigh tax-shelter considerations among such donors, and cite previous limitations placed on deductions for high earners that they say haven't hurt donations.

Former Obama OMB Director Peter Orszag made the same point, noting that the proposed cap is the same as the level when President Ronald Reagan slashed the top tax rates from as high as 70 to just 28 percent:

The evidence suggests that many factors affect charitable contributions, including the desire to help the charity and overall economic conditions. (The most recent example with changing the tax code illustrates that point. Between 2002 and 2003, the top income tax deduction for charitable contributions was reduced from 38.6 percent to 35 percent - and yet individual charitable contributions rose, presumably because other factors were a more important influence on giving than the change in the income tax.) Furthermore, about 75 percent of overall contributions would not even be affected by the proposed income tax change - because the contributions come from individuals who would not be affected or from corporations or foundations not subject to the individual income tax.

All of which raises two critical questions. Who benefits from the deduction on charitable giving now? And where do their donations go?

Currently, a couple earning over $450,000 a year pays a 39.6 percent marginal tax rate, meaning a $1,000 charitable gift only costs them $604 after taxes. As a quick glance at the 2013 tax brackets shows, President Obama's plan would cap the deduction at 28 percent (or a $720 after-tax cost) for couples earning over $223,050 annually. "In 2011, the wealthiest Americans--those with earnings in the top 20 percent--contributed on average 1.3 percent of their income to charity," Ken Stern documented in The Atlantic. "By comparison, Americans at the base of the income pyramid--those in the bottom 20 percent--donated 3.2 percent of their income."
But overall, only about 30 percent of filers itemize their deductions. But as Ezra Klein explained last year, "80 percent of tax savings from itemization goes to the top 20 percent of Americans households, and 25 percent of the savings goes to the 1 percent." Which means it's no secret why, Klein's colleague Dylan Matthews explained, the savings from the charitable deduction "seems to help the rich":

After all, they are more likely to itemize their tax returns, and the deduction is worth more for people in higher tax brackets. That's why the CBO found that $33 billion of the $39 billion deduction went to the top quintile, and that the top one percent gets more out of it than any other group, as a share of income.

Just as important from a public policy standpoint is which types of charities--and which groups of Americans--are the recipients of their largesse. As Matthews explained, "Only a third of charitable contributions go to the poor." Stern offered an even more sobering statistic:

Last year, not one of the top 50 individual charitable gifts went to a social-service organization or to a charity that principally serves the poor and the dispossessed.

Churches, synagogues, mosques and other religious organizations are the largest recipients of charitable support in the U.S., especially for lower-income donors. (That does not include donations to religiously inspired service groups like the Salvation Army or Episcopal Relief and Development.) As Matthews' chart below shows, "Next up is education -- including donations to universities and private secondary schools -- and only then do you get to human services, where groups like the Red Cross fall."

The generosity of the American people has been a defining feature of the United States from its founding. So, too, is the freedom to support the cause or causes of one's choice, without interference or coercion from the state. But the data suggest that outside of the estate tax, changes to the IRS' charitable tax deductions will have little overall impact on total contributions to non-profit groups. But at a time of budget constraints when lower-income Americans are still struggling, the United States should not prioritize a tax deduction that primarily benefits the wealthy few and their select charities. Letting them pocket a little less so the hungry, the poor and the jobless can keep a little more seems like the right-trade off.
Even for the right-wingers who cast their votes for Paul Ryan's budget in 2011, 2012 and 2013.


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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