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Click Here to Sign the PetitionPresident Obama has for some time been trying to reduce or eliminate tax deductions for larger charitable gifts. Now it appears that the Republicans may have joined him. They are doing it at a time when donations to charities, decimated by the Crash of ’08, have still not recovered, at a time when states and localities are trying to levy more taxes on charities to try to reduce their deficits, and at a time when the need for charity has never been greater.
Presidents Bush and Obama decided to bail out auto companies and Wall Street. So why try to tear down the whole charitable sector? That sector represents about 11% of the economy; it employs 13.5 million people, about 10% of the workforce.
Is charity work—devoted to the general welfare, typically done with lower pay and benefits than in either government or business—less important than that done by auto workers or Wall Streeters? The president famously said, “These aren’t games we are playing here. Folks are out of work.” Exactly—and they’re out of work in the charitable sector too, where we really need them working.
Why are charities getting kicked around right now? It’s an old saying in Washington, DC, that those who do not come to the table (by hiring sufficiently well connected lobbyists and making campaign contributions) will become the lunch. Charities (with a few exceptions) are not exactly a lobbying powerhouse and are barred by law from making campaign contributions or participating in elections, a tremendous disadvantage in our crony capitalist system. This may explain President Obama’s decision to go after them for government revenue and the Republicans decision (perhaps) to go along.
President Obama did seem to be paying lip service to charities in his Democratic Convention acceptance speech. He said, “We know that churches and charities can often make more of a difference than a poverty program alone.” But look at that more closely, especially the words “often” and “more.” The president was really saying that charities do not always make a difference and if they do it is by adding to what government is already doing.
That was actually pretty dismissive. Most studies show that nonprofit social agencies are much more effective than government agencies, whether it is rehabbing drug addicts or delivering services to the poor. Furthermore, charities offer diversity. They are a laboratory of ideas and approaches, something that the government can never be. They also represent people-to-people solutions, the democratic ideal in action. This feature of charity is not necessarily welcome in crony capitalist circles.
Earlier, the president had proposed a sharp curtailment in the ability of single people with incomes over $200,000 or families with incomes over $250,000 to take a tax deduction on charitable gifts. He proposed this several times, but did so most recently as a way to pay for his proposed 2011 jobs stimulus bill. And this reduction in the charitable deduction would be on top of another reduction (the “Pease limitation”) that was already scheduled to come back with the end of the Bush tax cuts.
In 2009, the president said, “I think it [reducing the charitable deduction] is a realistic way for us to raise some revenue from people who have benefited enormously over the last several years.” But that doesn’t make any sense. Taking away the charitable deduction doesn’t penalize the rich; it penalizes the charities and the people being served by the charities. If the rich don’t give, they will end up with more money, not less.
Obama’s budget director at the time, Peter Orszag, seemed to acknowledge this—that it was the charities, not the big donors, who would suffer under this proposal—when he said that charities should be willing to make this sacrifice in return for more people getting health insurance under the Patient Protection and Affordable Care Act (“Obamacare”). But this didn’t make any sense either. First, yanking the charitable tax deduction was not part of the president’s plan to finance broader healthcare. Second, reducing the deduction actually makes it harder to cover more people.
This last point only requires a moment’s thought. If you want to cover more people, you need more doctors and nurses and clinics. In economic terms, if you increase demand, you should increase supply. Otherwise, people with the new health coverage still won’t be able to see a doctor or have to wait for weeks and weeks, and prices will likely soar.
This is not an abstract idea. It is already happening just this way in Massachusetts under Romneycare. Newly covered people can’t find a doctor, and prices are rising so rapidly that the legislature has just passed a price control system (even though price controls almost always fail). So if you need more healthcare supply nationally, how does it help to take a hatchet to nonprofit healthcare providers?
Keep in mind that a lot of the healthcare providers in the US are nonprofit. This includes 62% of hospitals, 30% of nursing homes, and all of the healthcare organizations that President Obama has publicly praised as role models.
The president also said that “there is very little evidence that this [cutting the charitable deduction] has a significant impact on charitable giving.” In fact, the evidence says the opposite, that for every 1% reduction in the deduction, gifts from wealthy people fall 1%.
That kind of drop in charitable giving would be devastating for nonprofits. As David Harris, executive director of the American Jewish Committee, wrote to the president, “Most nonprofits derive 70 to 80 percent of their donations from a small proportion of their donors who are major givers. This proposal will deal a major blow.”
Moreover, “taxing” major donors’ gifts would not even produce that much revenue for the government, only an estimated $54 billion a year. Compare that to the $300 billion in tax subsidies for health insurance or the overall budget deficit of over $1 trillion. And let’s remember that charities would be expected to lose at least $54 billion and possibly much more.
President Obama added that he doesn’t think it is fair that someone in the 35% tax bracket gets a 35% deduction while someone in the 28% tax bracket gets a 28% deduction. Before we get too worried about this, let’s remember that the employer tax deduction for health insurance works the same way ( the higher your income, the bigger deduction you get) and involves much more money. But the president did nothing to change that in his healthcare legislation because unions did not want it changed.
Furthermore, there is an easy fix to put everyone’s tax treatment for charitable giving on the exact same footing. Independent Sector, representing nonprofits as a whole, has proposed that “charitable contributions should not be included in an individual’s adjusted gross income [subject to tax].” This change from a tax deduction to a tax credit would treat everyone alike and produce a torrent of income for charities. If government doesn’t want to go that far, how about a tax credit for charities that directly help the needy?
The president’s proposal to “tax” charities harder was first made when he had Democratic majorities in both the House and the Senate. Despite the majorities, it did not go anywhere. No one seemed to back it until Mitt Romney suddenly embraced it toward the end of the presidential campaign. But did he in fact embrace it?
What Romney actually said was that tax rates for everyone, including the highest earners, should be reduced in order to help the economy. In return, he would propose to cap itemized deductions to a maximum of $17,000, $25,000, or $50,000 (all three figures were offered as “examples” rather than proposals). Romney also wasn’t clear about whether the cap would apply to all itemized tax deductions (e.g.,. state income taxes, mortgage interest, and charitable gift deductions, but presumably not health insurance deductions) or just some of them.
Here is how an online reader reacted to the Romney proposal, which he assumed meant that charitable deductions would be cut. “[Let’s say that you give 5% of your income to charity and I give none.] The Romney plan stops rewarding you for being a better human being than me and…[ instead] rewards me for being a jerk.”
Regardless of what Romney actually intended, his remarks suddenly put the charitable deduction, part of the tax code since 1917, in grave peril. Only a few days after the 2008 presidential election, Democrats started pointing out that eliminating deductions was a Republican proposal, although they conveniently left out the part about cutting tax rates first.
Republican House Speaker Boehner (R-OH) said that he would be open to increasing government revenues, but not increasing tax rates. This was code for saying that tax deductions in general would be on the chopping block. Congressman and vice presidential candidate Paul Ryan said the same, and so did Glenn Hubbard, one of Mitt Romney’s chief economic advisors.
Will the charitable deduction for large donors survive? It depends on how we, the voters, react. Do we want more charity, or less? Do we want social services to be provided only by government or for-profit businesses, or do we want a thriving nonprofit sector?
Most countries do not have a thriving nonprofit sector. Europe does not have it, nor Japan. This has been a uniquely American phenomenon, recognized and encouraged by our tax laws. Now it is under attack. Whether that attack succeeds will make a big difference in the kind of country we are. If we care, and we should, we have to make our views known on Capitol Hill.
It is possible that Congress will decide this in the next few weeks. We need to tell Congress immediately not to throw charity under the bus!
Please take action now by signing this petition. It will be sent to your senators and congressional representative.