Many nonprofit organizations are under severe financial
pressure. They need donations more than ever, and the hurting
people they serve have a stake in the unrestrained flow of those
However, President Barack Obama's proposed budget for fiscal
year (FY) 2010 moves in the opposite direction. It would raise
taxes on those who can give the most and reduce their income tax
deduction for charitable giving. This not only weakens one of
the incentives to give, but also shifts perceived
responsibility for social welfare from individual donors toward the
The Administration's Proposal
In February, the Obama Administration released its proposed
federal budget for FY 2010. Included in the document are proposals
to raise tax rates on high-income earners and to reduce their tax
deduction rate on gifts to charities. These strategies are intended
to raise funds for President Obama's health care plan.
American citizens in the highest marginal income tax bracket are
taxed at a rate of 35 percent.1 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 bracket gives
$10,000 to a hospital, they can write off $3,500 when filing
their taxes. This write-off is not only an incentive to give to
charitable organizations, but also a means for the couple to
control more of their own money, from which they can potentially
donate more to charity.
Under the President's proposal, beginning in 2011, families
making over $250,000 per year would see their marginal personal
income tax rate rise from 35 percent to 39.6 percent.2 Rather than
keeping the charitable deduction rate consistent with the tax rate
or even maintaining it at the present level, Obama proposes
reducing it from 35 percent to 28 percent. At this reduced rate,
the possible tax write-off for a $10,000 donation would drop from
$3,500 to $2,800, a reduction of $700.
The Obama Administration estimates that its proposed tax changes
will provide $630 billion in additional revenue over 10 years.
The Likely Consequences
The President claims that his tax plan will have only a small
negative effect on charitable giving. Measured as a percentage,
this may be true, but the estimated reduction in giving means
billions of dollars less each year for charities, especially
if weak economic conditions continue.
Scholars at the Center on Philanthropy at Indiana
University recently looked at how the Administration's tax
proposals would have affected giving among the wealthy in 2006 (the
most recent year for which itemized deduction data are available).
In 2006, taxpayers earning more than $200,000 accounted for about
44 percent of all itemized charitable gift deductions. The
center estimated that if Obama's proposed changes had been in
place, total itemized contributions from wealthy households would
have been almost $4 billion lower.
While this is only a small percentage of total annual charitable
donations, it is more than the combined annual operating budgets of
the American Cancer Society, World Vision, St. Jude
Children's Research Hospital, Habitat for Humanity, and the
American Heart Association. Moreover, other scholars estimate that
under Obama's proposal, annual donations to charitable
organizations would drop by more than $4 billion and possibly by as
much as $9 billion.
The Obama tax plan will likely have the greatest effect on
organizations that depend on donations from high-income Americans.
Universities and medical centers could be hit particularly hard.
The President has stated that he wants to increase the number of
college graduates in America and promote research leading to
significant medical breakthroughs. However, his proposed tax
changes will make it more difficult for wealthy donors to make the
large financial gifts on which many educational and medical
Crowding Out Civil Society
In addition to receiving less money from wealthy donors,
charitable organizations could face a more subtle yet significant
challenge under the Obama plan: Government could crowd them out of
social welfare provision. This phenomenon occurs when government
claims increasing responsibility for tasks traditionally performed
by civil society and absorbs a larger percentage of the resources
dedicated to carrying out those tasks.
Studies have shown that government spending on charitable causes
leads people to give less to charity. According to Arthur
Brooks of the American Enterprise Institute, a dollar in government
spending on nonprofit activities displaces up to 50 cents in
private giving. One study, for example, reveals that:
Franklin Delano Roosevelt's New Deal programs sharply
reduced churches' charitable giving to the poor: The researchers
noticed a 30 percent drop in church-based charity from 1933 through
1939, as federal spending to aid the needy went from zero to
more than 4 percent of GDP. The researchers concluded that
government funds were directly responsible for nearly all the drop
in private church charity.
This "crowding out" effect does not occur only when government
actually spends money on social programs for the poor. Brooks found
that merely endorsing such policies-simply believing that
government should move in that direction-displaces giving:
The evidence...connects charity with beliefs, not policies. The
data tell us that it matters little whether the government is
actually redistributing income and lessening inequality-what
appears to displace charity is a person's support for these
Such evidence demonstrates the subtle but significant power
that policy proposals exert on citizens' assumptions,
expectations, and actions.
President Obama defends his proposal as a way of "equalizing"
tax breaks for donors in different tax brackets. In his news
conference on March 24, 2009, he said it would not be fair to allow
wealthy donors to write off more than can be written off by
lower-income or middle-income donors who give the same amount:
"[U]ltimately, 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 more."
However, the President ignores the fact that the less than 5
percent of workers who earn more than $250,000 annually pay 48
percent of all federal income taxes. That they may use the
deduction to redirect a portion of this to private charities does
not change the simple fact that the wealthy shoulder a larger
burden for social welfare under the present tax system. President
Obama's statement about the "more fortunate" paying more is not the
issue because they already pay more. The point, rather, is that he
seems to believe that the federal bureaucracy can deploy the
resources of the wealthy more effectively than nonprofit civil
society organizations can.
Furthermore, the concern for equalizing tax breaks for donors
risks distracting attention from President Obama's stated concern
for helping "folks who have fallen on very hard times."
The President admits that his plan will reduce charitable giving.
Ironically, however, he seems to be letting his desire to equalize
differences among donors undercut his desire to help the poor. To
remain consistent with his rhetoric, he should instead create
conditions in which individuals can maximize their voluntary
donations to charity, especially in tough economic conditions.
The Wrong Message
Perhaps most important, President Obama's proposal sends
the wrong message about the value of civil society and the role of
government. Choosing to raise taxes while reducing charitable
deductions for high-income earners indicates that the President
thinks government can best determine how to distribute
In their influential book To Empower People, Peter Berger
and the late Richard John Neuhaus describe the importance of
"mediating institutions" to a healthy democratic society. Such
institutions include the family, churches, and nonprofit
organizations, which stand between citizens and the large
institutions of public life.
Mediating institutions are essential for generating and
maintaining the operative values of American 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, and 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
often for less money. Smaller and more flexible than most
government bureaucracies, local church congregations and
charities can also spawn creative social innovations that benefit
those in need.
Berger and Neuhaus argue that public policy should "cease and
desist from damaging mediating structures." More than that,
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 in President Obama's budget blueprint runs
counter to the basic philosophy underlying these propositions.
The President's proposal conveys the belief that government can
decide better than individuals how their dollars should be
spent. It also implies that the state should assume responsibility
for people's needs even at the expense of vital mediating
institutions. Ultimately, it communicates the notion that
America is better off with expansive and intrusive government than
it is with limited government.
In short, President Obama's proposed tax plan would weaken the
role of the local, the personal, and the voluntary. It would
penalize those who can give the most, shift dollars from citizens
and local private charities to distant government
bureaucracies, and prioritize mandatory taxation over
voluntary tithing and charitable giving.
Such messages are important-perhaps more important than the
amount by which charitable giving would decline in the short
term. These messages say that people should look more to government
for help in times of need. They direct people's assumptions
and expectations about how the common good should be pursued in
Regrettably, President 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, and mutual obligations and
increase dependence on government. The President's vision of
expanding government control of health care exemplifies this
mindset, and his objective of government-controlled health
care is driving the plan to raise taxes and reduce charitable
deductions for wealthy citizens.
President Barack 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
roles that charitable institutions play in America. He should send
an equally clear message in his policy. Reconsidering the
proposed tax changes regarding charitable donations would be a
good place to begin.
Ryan 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
marginal tax rate is the statutory rate at which a taxpayer's last
dollar of income is taxed.
personal income tax rate for those in the second highest bracket
would increase from 33 percent to 36 percent.
Calculation based on 2007 and 2008 figures in
American Cancer Society, "Combined Financial Statements as of and
for the years ended August 31, 2008 and 2007," February 23, 2009,
ds/AA/ACS_Combined_Financials_FY2008.pdf (April 7,
2009); World Vision, "Consolidated Financial Statements, World
Vision, Inc. and Affiliates, September 30, 2007 and 2008," December
12, 2008, at http://www.worldvision.org/resources.nsf/main/PRES08830_AFS_
2008.pdf/$file/PRES08830_AFS_2008.pdf (April 7,
2009); St. Jude Children's Research Hospital, 2007 Annual
Report, at /static/reportimages/BC9FFA4418F32BE79E59712425C57845.pdf (April
7, 2009); Habitat for Humanity International, "Return of
Organization Exempt from Income Tax," Internal Revenue Service Form
990, January 27, 2009, at /static/reportimages/11D29CE1F818D8A14629AF9DEC5C3D7E.pdf (April
7, 2009); and American Heart Association, "Return of Organization
Exempt from Income Tax," Internal Revenue Service Form 990,
November 5, 2008, at http://www.americanheart.org/downloadable/heart/1227636087145
Editorial, "The 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 7, 2009),
and 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 7, 2009).
Arthur C. Brooks, Who Really Cares: The
Surprising Truth About Compassionate Conservatism (New York:
Basic Books, 2006), p. 58.
Ibid., p. 61 (emphasis in original).
Obama, "News Conference by the
Peter L. Berger and Richard John Neuhaus,
To Empower People: From State to Civil Society, 20th
anniversary ed. (Washington, D.C.: AEI Press, 1996), p. 158.