As Americans finish up their tax returns by April 15, those claiming deductions are likely counting up what they gave last year – not only in taxes but in donations. The charitable tax deduction remains a popular goad for giving, especially among the wealthy. This tax carrot especially entices the rich to part with their money and direct it to the needy, which only helps reduce income inequality.
It is puzzling, then, that President Obama – for the sixth year in a row – has asked Congress to lower the cap on how much people with incomes over $200,000 can deduct when they give to charity.
A 2012 study by the Indiana University School of Philanthropy shows the Obama proposal would contribute to a 2.4 percent decline in giving. The estimated loss could be as high as $9.4 billion. That would eat into many private antipoverty programs. About 80 percent of the wealthy donate to basic-needs charities and give about 9 percent of their income overall. Even the much-reviled “1 percent” give more than a third of all the itemized charitable deductions. The negative effects of the president’s proposal would argue against its apparent purpose: collecting more in tax revenue.
Obama is not alone in trying to chip away at a tax break that has been around since 1917. A Republican proposal in the House would allow a person to deduct charitable contributions only when the donations exceed 2 percent of gross income. That idea could result in some $3 billion less in giving.
But the White House proposal is doubly puzzling because Obama plans to rely on private donations for a new federal initiative that he launched in February and one that is very close to his heart.
Called “My Brother’s Keeper,” it aims to help young men of color who face tough odds in reaching their full potential. Two of is targeted reforms are parental engagement and school discipline.
For new funding, the program will depend on philanthropic institutions. Some eight foundations have already pledged $200 million over the next five years on top of $150 million they are already spending. The release of the program’s strategy is expected within a few weeks.
Allowing people to use their income for the well-being of others and thus avoid paying taxes on it should not be seen as a loophole or as a loss to other taxpayers. Private giving is a complement to public programs. And it is often more efficient, innovative, and direct.
The charitable tax deduction has long served as a nudge to encourage greater generosity in a country that already ranks high in giving per capita. In 2012, about two-thirds of American households gave nearly $316 billion to charitable causes. Three-quarters of those donations came from taxpayers who claim the deduction.
The freedom to give should not be regarded as a burden to others. Affection can flow through both the payment of taxes and private giving to charity – without conflicting with each other.