Among the claims that modern liberalism likes to make is that, unlike conservatism, it “cares for the poor” and pursues policies that make that sentiment real. This claim, already weak (see liberal opposition to welfare reform and school choice), is about to grow weaker still. We have in mind President Obama’s proposal to limit tax deductions on charitable giving.
The administration’s recently released budget will limit tax deductions on gifts made to charities by those earning over $250,000 a year, raising (we are told) almost $180 billion over the next ten years. It’s an extraordinary grab for money — money given to private charities by private citizens as private donations. These donations directly fund programs that (among other things) feed, clothe, and house the poor, deliver after-school programs to disadvantaged children, build new facilities for colleges and other schools, and generally enrich everyone’s lives through education and the arts.
The way this will work in practice goes like this: Assume someone in the top tax bracket wants to make a $1,000 donation to a local homeless shelter. Currently they would be eligible for a deduction at the top 35 percent rate, so the donation costs them only $650. This proposal would allow deductions at only the 28 percent rate, meaning the donation will now cost $720, an increase of over 11 percent. In other words, $70 that could have gone to the homeless shelter will now go to the government. In the aggregate, then, charities can expect to lose about 7 percent of their contributions from givers in the higher tax brackets. The new top tax rate of 39.6 percent in 2011 makes the math even more punitive, making the cost of donations 19 percent higher.
A study released Friday by the Center on Philanthropy at Indiana University shows that if the provision had been in place in 2006, charities would have lost almost $4 billion in donations in the intervening period. With the incomes of the so-called wealthy dropping, at the same time that their taxes are going up, it’s hard to see how limiting the deduction will not have a significant impact on charitable giving. The dollars taken away from private donations and directed into government coffers are not going to be magically replaced.
Yet the administration claims this move will have little to no impact on the level of giving. The director of the Office of Management and Budget, Peter Orszag, argues that
the most recent example with changing the tax code illustrates that point. Between 2002 and 2003, the top income tax deduction for charitable contributions was reduced from 38.6 percent to 35 percent — and yet individual charitable contributions rose.
This argument is intended to obscure rather than to clarify matters. The deduction was reduced to 35 percent because the top tax rate was reduced to 35 percent. Taxes were going down, while at the same time the economy was rebounding. If anything, this example illustrates that charitable giving is sensitive to the after-tax incomes retained by these households, just as one would expect. It is sheer folly to assume that Obama’s planned tax-rate hike, combined with limiting the deduction for charitable giving, won’t have a significant negative effect on private giving.
The Obama administration’s unprecedented intrusion into the private sector betrays its underlying philosophy. In his speech before a joint session of Congress last week, the president declared that he doesn’t believe in bigger government. Oh yes he does, in ways we have never quite seen before.
With this proposal, President Obama is saying as directly as it can be said that the federal government is better able than private citizens and the charities they support to decide how these donation dollars are best distributed. Conservatives, by contrast, believe in the principle of subsidiarity — which in this instance means that charity is best performed at the most local and immediate level possible, and by “mediating” institutions rather than large, distant, and bureaucratic ones. This is not an abstract doctrine; it is based on the accumulated wisdom of the ages.
President Obama is willing to see private charitable giving to the poor decrease in order to see the scope and size of government increase. These are the actions of an ideologue, not a “pragmatist.”
The Obama budget is going to give us a record fiscal deficit. It will create a troubling compassion deficit, as well.
– Phillip Merrick is a technology entrepreneur, philanthropist, and board member of two charities that serve the poor. Peter Wehner, formerly deputy assistant to President Bush, is a senior fellow at the Ethics and Public Policy Center.