The Republican proposal to step away from the fiscal cliff is to raise revenue by cutting tax deductions while also lowering overall tax rates. Democrats would keep rates higher for those who make over $250,000, and probably cap their tax deductions at $50,000. So it looks like we have some agreement from both sides and that deductions for home mortgages, state taxes, and charitable giving will be cut, if not cut out entirely. From Ezra Klein:
“Base-broadening, rate-lowering tax reform.” It sounds so good, right? But what if you call it what it really is? Charity-destroying, home-shrinking, state-burdening tax reform.
Doesn’t sound as good, does it?
But that’s really what we’re talking about. The term ”base-broadening, rate-lowering tax reform” has the advantage of vagueness: No one knows what it means. But the practical definition, at least the one that’s emerging in the ongoing “fiscal cliff” negotiations, is tax reform that limits itemized deductions among high-income taxpayers. And as former OMB director Peter Orszag points out, 90 percent of the value of those deductions comes from just three categories: “taxes paid (mostly state and local taxes), home-mortgage interest and charitable contributions.”
So when we say “base-broading, rate-lowering tax reform,” here’s what we’re really saying: Tax reform that’s paid for by cutting tax breaks for charities, homes, and state and local taxes.
Most economists will tell you that cutting the home-mortgage interest deduction, particularly for high-income taxpayers, is a good idea. There’s no real reason the tax code should be subsidizing McMansions. But cutting the break for charities is more complicated. As Orszag writes:
In 2009, households with incomes of more than $200,000 claimed almost $60 billion in charitable deductions — or about 20 percent of total charitable giving in the U.S. that year. Households with incomes of more than $10 million claimed an average of $1.75 million each in charitable donations in 2009, and they accounted for roughly 5 percent of all giving.
Charitable giving reacts to tax incentives, and in response to any limits on deductions it could even fall by about the same amount as the increase in the tax bill, according to John List of the University of Chicago, who recently reviewed the literature on this subject. Other studies have suggested an effect about half as large. Even that smaller estimate, though, suggests that limiting deductions to $50,000 a year could easily reduce giving by tens of billions of dollars.
As Klein says, “limiting itemized deductions in order to raise revenues is a tax increase.” So the Republican plan to eliminate or cut back on these deductions as a way to raise revenue is a tax increase, even if other rates are lowered.
People complain about “the rich,” but whenever there is a capital campaign for a museum, a college, an arts group, a charity, or a church, the wealthy are wooed and generally come up with most of the money. Conservatives want “the private sector” instead of the government to bear more of the responsibility to help the poor, support the arts, and do other good works. That means those worthy causes would need the support of wealthy donors. Do you think that donors would be as generous as they are without the incentive of a large tax deduction? I am convinced many of them would, but I worry about the practical effect on non-profit organizations (which incorporate for that status precisely so they can become tax deductible).
What impact do you think cutting deductions for charitable giving might have on churches? Specifically, on your congregation? Probably most of your members come nowhere near the high-income level that would trigger the limits. And yet a total limit of $50,000–including home mortgage, state taxes, charitable giving, and everything else–would hit people who don’t consider themselves all that wealthy. [Tote up how much you deducted last year.] And yet, very often a big chunk of a congregation’s revenue comes from a few families. Again, one would hope that they give because the Lord loves a cheerful giver, because they believe in tithing, because they see themselves as stewards of the Lord’s gifts, etc., etc. But a tax deduction is surely an incentive to generosity. What would happen if all deductions for giving to the church were eliminated for everybody?
Perhaps this would become liberating in the long run. No more would churches or other organizations have to operate under the regulations for non-profits. They could express political opinions and endorse candidates without the threat of losing their tax-exempt status.
At any rate, we need to consider the consequences–including especially the unintended consequences–of these proposed changes. (And remember, these ideas aren’t coming primarily from liberals but from Republicans.)