The Charity Tax

Harvard economist Martin Feldstein cites research showing that when the cost of giving goes up, donors reduce their giving by the same amount. He concludes that the Obama administration’s plan to limit the deductibility of charitable gifts from 35% to 28% for couples making over $250,000 would have a devastating effect on America’s charities and non-profits.

President Obama’s proposal to limit the tax deductibility of charitable contributions would effectively transfer more than $7 billion a year from the nation’s charitable institutions to the federal government. But the high-income taxpayers affected by the rule change are likely to cut their charitable giving by as much as the increase in their tax bills, which would, ironically, leave their remaining income and personal consumption unchanged.

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.

Churches, I suspect, could mostly weather the storm, since their giving comes from the tithes and offerings of their members, most of whom are probably not in the highest income brackets. But other worthy causes, including Christian colleges, often do depend on the philanthropy of the well-off. That the proposed scheme would end up transferring money from the charitable organizations to the government is especially disturbing.