In effect, the change would be a tax on the charities, reducing their receipts by a dollar for every dollar of extra revenue the government collects. It is hard to imagine a rationale for taxing schools, hospitals, medical research budgets and arts organizations in this way.
Let me try to awaken his imagination.
Here is the rationale: The deduction is deeply regressive. If you are in the highest tax bracket you can deduct $350 for a $1000 donation. If you are in the lowest tax bracket you can only deduct $150 on a $1000 donation. (This is all self-plagiarism.)
Of course, you might say, "We can live with a little tax regressivity if it creates an incentive to do something that we all think is good." And I take it that Marty Feldstein thinks charity is something we should all consider good.
I think charity is pretty good too, but there are still two problems. First, the tax code does not define charity narrowly. You can claim the same deduction on giving to an amateur sports league as you can for founding a hospital. I'm not in a position to say which of those is more beneficial to society as a whole. But neither is Warren Buffett or Eli Broad. Decisions about what will make our community better should be made communally -- by pooling revenue and making collective decisions about where and how it should be spent.
The second problem is deeper: It's a mistake to think about charity as an entirely selfless and personal sacrifice on the part of the donor. It is also charitable spending. High income individuals give to charity in part because they derive some benefit from the gift: They get their name on the building, or the continued benefit of an opera in their hometown, or the warm glow admiration from their peers. Why feel confident that this kind of spending should be subsidized?
I have to say, I despair over this issue: It’s not simply that people on opposite sides disagree; it’s that we’re speaking two different languages. I would never consider the charitable deduction “regressive”. In fact, the disparity arises because our tax structure is progressive. To me, you’re taking a policy that places a heavier tax burden on rich people and using a mathematical consequence of it to argue that rich people are somehow getting away with something.
Even if I could accept the Obama-Orszag-Clarke “regressive” argument, however, the proposal on the table does not address it fairly. The 2008 tax rates were 35, 33, 28, 25, 15, and 10. If you believe the 35% bracket (and most of the 33% bracket) is unfair vis-a-vis the 15% bracket then so are the 28% and 25% brackets. If you want to do away with the “regressive” nature of the charitable deduction you must make it the same for all tax brackets.
Similarly, your claim that organizations defined as “charitable” are not always what most people would consider a worthy cause is an argument for doing away with the charitable deduction entirely not for a targeted limitation of it. (I made my point about the difficulty of putting a dollar value on intangible benefits in my comments to this old post of yours.)
It seems to me there are only two ways to fairly resolve the unfairness you see in the current handling of charitable deductions. One is to do away with the progressive nature of the tax code; in other words, a flat tax. This takes care of rich people getting more oomph from their charitable giving. Personally, I hate this idea but it would get rid of the "regressive" nature of the charitable deduction.
The other solution is to do away with the charitable deduction totally. No one in any tax bracket who gives money to charity can deduct any of that amount from their pre-tax income. Personally, I’d be fine with this. In fact, I go further and favor eliminating all deductions for all income levels. This makes the tax code simpler and clearer - which should do away with a lot of the feeling that “the rich” are somehow getting away with something every time they file a tax return. And since - apparently unbeknownst to most - Obama’s plan actually calls for limiting not just charitable giving but all itemized deductions for households making over $250,000 per year, my plan would spare everyone from having to fight about this same issue when it’s time to talk about something like medical expenses.
Non-profits are strange institutions in my book. Especially when they start to delve into for-profit areas, for instance if a hospital decides to run a little eatery, or a church decides to run a little day-care. In that case, there is a very unfair advantage that they have in their tax exempt status.
I agree, Conor. In fact, I'd argue that a shrinking of non-profit institutions in general would even be a net benefit.
Moronic argument. Of course those in the highest bracket get the highest benefit - they pay the highest rate!
Just because one doesn't possess the grey matter necessary to grasp the rationale behind an argument doesn't make the argument moronic. The deduction being lowered from 35% to 28% likely assumes the average of all rates on taxes filed; i.e. not just taking it off the top bracket. Honestly, I agree with different aspects of some of the above arguments (and disagree with others. But I am not going to argue anyone's argument as moronic. That statement reflects a personality unlikely to understand what the word charity actually means, other than its result on that person's tax form.
The higher value on the deduction is fair because of the higher marginal rate. This whole proposal is an attempt to raise marginal tax rates without having to call it a tax increase.
The more alarming thing here is the narrowing of the tax base: Obama and friends seem to want the country to be a place where most people get government entitlements but only a small number of people actually pay taxes. We can look at the job losses and capital flight in California to see how well that will work for the country.
http://taxpolicyblog.wordpress.com/2009/03/26/obama-charity-tax/
Typical Limbaugh rhetoric... ~What a shame that people who make more don't get bigger breaks.~ What does "entitlements" or "job losses and capital flight in California" have to do with charitable contributions and the rate at which they're taxed? Misdirects, that's what.
Nobody, including Obama is denying that it's a tax increase. Despite the fact that it's still lower rates than when Reagan was in office, silver-spoon babies still feel obligated to complain.
Whiners.... Grow up and be patriots, instead of worrying about affording next year's Lexus. Give to a food bank. Donate to a school fund. "Alarming", indeed, is what this country has come to. A bourgeoisee that claims the mantle of moralism while yelling through megaphones from their mansions about the injustices they're enduring.
Okay, lets say Joe the Patriot (JP, for short) is doing pretty well this year. He's made exactly X, where X is the cut off for the top tax bracket. JP likes to play scratchers once a week, and one day, behold!, he wins ten million dollars. Now, JP just increased his taxable income by 10 megabucks, and owes 35% of that to Uncle Sam: $3,500,000. JP, however, being a generous Patriot, gives it all away to food banks, the school fund, and a non-profit that wants to buy everyone in the county a little American Flag, which Joe likes since he's such a Patriot. If JP can deduct charitable spending as in the status quo ante, JP now only owes the taxes on X. If he can only deduct at a lower rate than the bracket of his actual income, he still owes money. If JP only gets relieved of taxes equal to 28.5% of that ten million ($2,850,000), he still owes Uncle Sam $650,000 in income taxes, which, if you've been paying attention, is more than twice what X is going to be.
So, do you really think that Joe should have to come up with an extra half-million-and-change to give away his entire 10 megabuck lottery payout and still be a Patriot? If not, step off.
Of course, if JP goes to his accountant Buddy first, Buddy will tell him to keep enough of the lotto money to pay off Uncle Sam, but it's still kind of a messed up situation when you actually, you know, think.
The problem with this argument is that it proves to much. If you're right about charitable donations, you're right about every other deduction. You should either admit that you're arguing for that and show us that tax policy would be better off overall or back off on the charity.
"Decisions about what will make our community better should be made communally -- by pooling revenue and making collective decisions about where and how it should be spent.".
I disagree with this. Why isn't it better to make these decisions in a more distributed way? For example, do you think that Nancy Pelosi and Harry Reid will be more efficient and honest at spending this money than (for example) Bill Gates?
Our party based government is disfuntional, corrupt, and inefficient. The nation has a low opinion of politicians and there is good reason for this. Why do we want to put any more power in their hands than is absolutely necessary? A more distributed approach to decision making is to be encouraged whenever possible.
It is natural to be idealistic about the possibilities of government when you are young. As you get older and wiser, you realize that American politicians are, in general, a scourge upon our society.
Hey, let's be honest: The only people who are taking the time to place comments here are those making less than 250K. People who make that much money are doing much more important things, and are probably workaholics....