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Research Desk estimates: How much would revenue Obama's charitable giving proposal produce?

By Dylan Matthews

wswest asks:

At some point, the Obama campaign had proposed limiting the deduction for charitable contributions (including to religious org's) to a base percentage rather than allowing deductions at the individual's highest marginal rate -- was that plan dropped?

The deduction change wswest is talking about was first proposed in Obama's fiscal 2010 budget, and after being blocked in that budget cycle it has reemerged in the fiscal 2011 budget proposal. It would change the treatment not just of the charitable giving deduction but of all itemized deductions. Because deductions are applied to the taxpayer's overall income, which is then subject to various tax brackets, they provide more benefit for high earners. People in the top tax bracket would see their tax bill reduced by 35 percent of, say, their charitable giving, whereas lower-income earners would see the bill fall by only 10 percent of their donation.

The Obama proposal seeks to make this more progressive by limiting deductions by those making more than $250,000 a year to 28 percent. That is, if taxpayers are in the 35 percent bracket, their deductions will reduce their tax burden only by 28 percent of their value, as opposed to 35 percent now. The Joint Committee on Taxation has estimated (PDF) that the entire proposal would raise $289.3 billion over 10 years.

Many critics of the proposal have warned that it would reduce charitable giving considerably, but a study from the Center on Philanthropy at Indiana University suggests otherwise. The proposal would reduce total itemized giving by 2.1 percent, or $3.87 billion out of $186.65 billion in total giving. This figure is dwarfed, however, by the drop in giving caused by the economic downturn. A 100-point change in the S&P 500 results is correlated with a $1.85 billion change in giving, and a $200 billion change in personal income is correlated with a $4.32 billion change in giving, according to the center.

It's also worth noting that this is not the only proposal formulated for changing the charitable giving deduction. Seth Giertz at the University of Nebraska at Lincoln has looked into the effect of several changes, including requiring a certain level of giving before it's deductible and making the deduction available to taxpayers who do not itemize, and estimated the impact on the budget in this paper (PDF), if you'd like to read more.

By Dylan Matthews  |  August 17, 2010; 3:20 PM ET
Categories:  Taxes  
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Little things like this would go a long way to correcting some of the more egregious deadweight losses in the tax code. Indeed, to my mind the appropriate policy is to set deductions for all at 28%. That way, if you give money to charity or (gag) pay mortgage interest, the government subsidizes 28% for everyone.

Oh please oh please oh please oh please...

Posted by: wcwhiner | August 17, 2010 4:23 PM | Report abuse

The words in the headline out are of order.

Posted by: thehersch | August 17, 2010 4:25 PM | Report abuse

It one of those obvious things that makes one wonder why it got absolutely nowhere.

Capping the deduction rate is fairer. There's no reason why a dollar of a teacher's charitable contribution should be worth less to the teacher than a multimillionaire's dollar contribution. There's no reason why a wealthy person should get more out of deducting mortgage interest than people of less means (for whom the tax break is really supposed to be targeted).

The only justification against it on the charitable side is if the larger deduction actually encouraged wealthier people to do more giving. But the development people at the 501(c)(3)s that I talked to didn't seem concerned that the proposal would reduce donations. And I think a 28% taxpayer subsidy is more than enough of an incentive to give, especially given the eccentric nature of some people's giving habits.

Posted by: dasimon | August 17, 2010 7:02 PM | Report abuse

There's also no reason for the millionaires dollar to be taxed at a higher rate in the first place. But we do that.

Posted by: krazen1211 | August 17, 2010 10:26 PM | Report abuse

"There's also no reason for the millionaires dollar to be taxed at a higher rate in the first place."

Well actually yes there is. The millionaire has lots of extra money, which the thousandaire and the hundredaire don't have. So the millionaire can be taxed at a higher rate without causing huge hardships to the millionaire, while adding needed funds to the public treasury. There. That wasn't so hard, was it?

Posted by: thehersch | August 17, 2010 11:09 PM | Report abuse

Following up on the hersch:

Conversely, there is a good reason not to tax low-income people at all (for instance, if they're having trouble just getting food on the table), so that already puts us in what is at least a two-tiered progressive system: zero up to a certain exemption, and at least one rate above that. So of course millionaire's dollar should be taxed at a higher rate than a poor person's dollar. Few people really believe in a true flat tax, which would impose the same tax on every dollar regardless of the earner's circumstance. Once that concession is made, the only questions are how many brackets and what are the rates.

The deduction, by contrast, seems perverse in giving the biggest breaks to those with the most. It makes no sense for home mortgage interest. And it only might make sense for charitable deductions if it produced more giving, which it may not.

Posted by: dasimon | August 18, 2010 12:01 PM | Report abuse

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