In February, the Obama Administration announced its proposals to
raise tax rates on high-income earners and to reduce their tax
deduction rate on gifts made to charities. These strategies are
intended to raise funds for Obama's health care plan.
The Senate Budget Committee passed an amendment by Senator
Robert Bennett (R-UT) to the budget resolution that would prevent
this policy from going into effect. Congress should give this
amendment full consideration. In so doing, it can resist government
crowd out of the valuable charitable work performed by individuals
American citizens in the highest marginal personal income tax
bracket are taxed at a rate of 35 percent. If they donate to a
charitable organization, they can receive a tax deduction at the
same 35 percent rate. For example, if a couple in this marginal
bracket gives $10,000 to a hospital, they can write off $3,500 when
filing their taxes.
Under Obama's proposal, beginning in 2011, families making over
$250,000 a year would see their marginal personal income tax rate
rise from 35 percent to 39.6 percent. Rather than keeping the
charitable deduction rate consistent with the tax rate, Obama
proposes reducing it to 28 percent. At this reduced rate, the
possible tax write off from a $10,000 donation would drop from
$3,500 to $2,800, a difference of $700.
The Obama Administration estimates that its proposed tax changes
will fill government health care coffers with around $630 billion
over 10 years.
The Likely Consequences
The President claims that his tax plan will only have a small
negative effect on charitable giving. Percentage-wise, this may be
true, but the estimated reduction in giving means billions of
dollars less each year for charities, especially if weak economic
Scholars at the Center on Philanthropy at Indiana University
estimated that, had Obama's proposed changes been in place in 2006,
total itemized contributions from wealthy households would have
dropped almost $4 billion.
While this amount is only a small percentage of total charitable
donations given each year, it represents more than the annual
operating budgets of the American Cancer Society, World Vision, St.
Jude's Children's Hospital, Habitat for Humanity, and the American
Heart Association combined. Moreover, other scholars estimate that
under Obama's proposal charitable organizations would see donations
drop possibly by as much as $9 billion every year.
In addition to receiving less money from wealthy donors,
charitable organizations under Obama's plan could face a more
subtle yet significant challenge: government crowding them out of
social welfare provision. This phenomenon occurs when government
claims increasing responsibility for tasks once performed by civil
society, absorbing a larger percentage of the resources dedicated
to carrying out those tasks.
Obama defends his proposal as a way of "equalizing" tax breaks
for donors in different tax brackets. In his March 24 prime-time
news conference, Obama said it would not be fair to allow wealthy
donors to write off more than lower- or middle-income donors who
give the same amount. "Ultimately," he added, "if we're going to
tackle the serious problems that we've got, then in some cases
those who are more fortunate are going to have to pay a little bit
But Obama ignores the fact that wealthy citizens get a higher
deduction precisely because they already pay more--a lot
more--in taxes. In fact, although families making over $250,000 a
year represent less than 5 percent of income earners in America,
they pay 48 percent of all federal income taxes. That a portion of
their giving may go to private charities instead of to the
government does not change the fact that, under the present tax
system, the wealthy already shoulder a larger burden for social
welfare. But Obama seems to believe that federal government
bureaucracy can deploy the resources of the wealthy more
effectively than nonprofit civil society organizations can.
President Obama has stated his desire to help "folks who have
fallen on very hard times." Yet he is standing by his
proposal to lower deductions for charitable giving, which would
hamper efforts by nonprofits to help needy families. The President
seems to be letting his desire to equalize differences undercut his
desire to help the poor.
Perhaps most importantly, Obama's proposal says something about
who Obama thinks can best determine how to distribute people's
In their influential book To Empower People, Peter Berger
and the late Richard John Neuhaus describe the importance to a
healthy democratic society of "mediating institutions"--i.e., forms
of association like the family, church, and nonprofit organization
that stand between citizens and the large institutions of public
Mediating institutions are essential for generating and
maintaining the operative values of society. They are also
well-equipped to provide a helping hand to people in the context of
face-to-face relationships. They have intimate knowledge of those
in need--they understand social problems in up-close and personal
ways. Driven by deep convictions and compassion, such organizations
can provide loving forms of assistance and care that government
programs cannot offer. And they often do so for less money. Smaller
and more flexible than most government bureaucracies, local
congregations and charities can also spawn creative social
innovations that benefit those in need.
Berger and Neuhaus claim that public policy should "cease and
desist from damaging mediating structures." More than that,
though, public policy should protect mediating institutions and,
where possible without co-opting them, empower them in their
efforts to promote the common good.
The tax plan put forward in Obama's 2010 budget blueprint,
however, implies that the state should assume responsibility for
people's needs even at the expense of vital mediating institutions.
And it communicates the notion that America is better off with
expansive and intrusive--rather than limited--government.
In short, Obama's proposed tax plan penalizes those who can give
the most, shifts dollars from citizens and local private charities
to distant government bureaucracy, and prioritizes mandatory
taxation to voluntary tithing and giving.
Unfortunately, Obama's proposed tax changes move the dial of
social responsibility one more notch in the direction of the state.
This sets a course for adopting many future policies that could
chip away at local, personal, mutual obligation and increase
dependence on government. For an example of this, one need look no
further than Obama's vision of expanding government control over
health care, which is the very objective behind proposals to raise
taxes and reduce charitable deductions for wealthy citizens.
The Bully Pulpit
Obama should use his presidential authority and influence to
encourage voluntary giving and protect nonprofit groups, especially
during tough economic times. President Obama speaks articulately
and often of the important role charitable institutions play in
America. He should send an equally clear message in his policy.
Reconsidering the tax changes proposed for charitable donations
would be good place to begin.
Messmore is William E. Simon Fellow in Religion and a Free
Society in the Richard and Helen DeVos Center for Religion and
Civil Society at The Heritage Foundation.
marginal tax rate is the statutory rate at which a taxpayer's last
dollar of income is taxed.
Those in the second highest income bracket
would also see their personal income tax rate increase, from 33
percent to 36 percent.
the charitable deduction instead stayed consistent with the
increased tax rate at 39.6 percent, the difference in tax savings
would be even greater. According to that scenario, the couple
making a $10,000 gift would go from a $3,960 deduction to a $2,800
deduction, a difference of $1,160.
Based on 2007 and 2008 figures available on the
organizations' Web sites.
Charity Revolt: Liberals Oppose a Tax Hike on Rich Donors," The
Wall Street Journal, March 10, 2009, at http://online.wsj.com/article
/SB123664427493678121.html (April 2, 2009); Ryan J.
Donmoyer, "Rich Donors May Be Undeterred by Tax Caps on Charitable
Gifts," Bloomberg.com, March 4, 2009, at http://www.bloomberg.com/apps/news?pid=newsarchive
&sid=aRLx2HwnWyWs (April 2, 2009).
Arthur C. Brooks, Who Really Cares: The Surprising Truth about
Compassionate Conservatism (New York: Basic Books, 2006), p.
Peter L. Berger and Richard John Neuhaus,
To Empower People: From State to Civil Society, ed. Michael
Novak, 20th anniversary edition (Washington, DC: The AEI Press,
1996), p. 158.