The administration has brought back the idea of reducing the tax deduction that wealthy people get for charitable gifts. Michael Gerson shows how wrong-headed this idea is:
For the second budget in a row, President Obama has proposed to reduce the tax deductions on donations by the wealthy, making it about 10 percent more costly for them to give to charity — and gaining the federal government about $300 billion in revenue over 10 years.
The public justification for this tax increase is fairness. The budget reads: “Currently, if a middle-class family donates a dollar to its favorite charity or spends a dollar on mortgage interest, it gets a 15-cent tax deduction, but a millionaire who does the same enjoys a deduction that is more than twice as generous.” In the last budget season, Obama argued this tax increase would “equalize” a disparity and “raise some revenue from people who benefited enormously over the past several years.”
Seldom has economic foolishness been more audacious, or populism more destructive to actual people. To begin with, the wealthy currently receive a 35 percent deduction for their charitable donations because they pay taxes at a 35 percent rate. Excluding a dollar in income from their taxes gains them a larger percentage benefit only because they pay a higher, progressive tax rate on their income. So why not boost the charitable deduction for the middle class to 35 percent in order to end this disparity? Because the administration’s goal is not fairness, it is federal revenue.
And who would provide this revenue? The administration responds: the wealthy. But that is not quite accurate. Under this proposal, the selfish rich — people who buy Bentleys instead of donating to colleges, hospitals and charities — would not be affected. Only the generous rich would be targeted. Instead of punishing the wealthy, this proposal punishes that subset of the wealthy who are giving away their wealth. That’ll serve ‘em.
The administration goes further, arguing that this tax on the generous rich won't influence the level of charitable giving very much, presumably because these idealistic saps will keep on donating even after they are penalized. But economic research shows what common sense indicates: When you tax something, you get less of it, and when you subsidize something, you get more of it. Roberton Williams of the Tax Policy Center estimates this tax proposal would cause a $10 billion drop in donations out of the $300 billion that Americans give annually — not a charitable apocalypse but a strain, particularly as nonprofits deal with the effects of the recession. Nonprofits, it turns out, depend on support from people who make profits.