Friday, March 27, 2009

Charitable deductions, the 28% cap, the furor and my response

The Episcopal Cafe recently posted a Washington Post story criticizing the impact of the President's proposed 28% cap on charitable deductions. That article was highly disappointing. I've submitted the following to the Episcopal Cafe and asked them to publish it:

On 3/25/09, JB Chilton posted an article in the Washington Post by Martin Feldstein on the impact of the proposed 28% cap on charitable deductions. Chilton said “It would be hard to find anyone more qualified than Martin Feldstein to predict the effects of President Obama's proposal to limit the tax deductibility of charitable contributions…”

I am very disappointed in Feldstein’s lack of analysis and in Chilton’s apparently unquestioning acceptance of Feldstein’s assertion. As readers may know, the proposal would allow earners in the top 2 tax brackets (earning over about $200,000 a year) to deduct donations at 28%. Normally, these earners would essentially be able to take deductions, if they itemized more than the standard deduction, at their top marginal tax rate of up to 39.6%.

First, Feldstein overestimates the net impact of the cap and doesn’t place it in the context of the total amount of charitable contributions. Paul van de Water, a senior analyst at the Center on Budget and Policy Priorities (disclosure: I am an intern there) shows that itemized deductions account for about 62% of total charitable giving. Only 18% of all itemized deductions would be affected by the President's proposal. The data used comes from the Urban-Brookings Tax Policy Center, a collaboration between two highly respected think tanks.

In total, van de Water calculates charitable giving would come down by only 2% - the article says 1.3%, but the Tax Policy Center just posted new data and we're updating. That's $6 billion out of $300+ billion in charitable contributions last year. That’s a bit less than Feldstein’s disappointingly unsophisticated calculations and not very much out of a large bucket.

Second, one would expect that the very largest charities, like universities and hospitals, would be more impacted by this proposal than the local soup kitchen, women's shelter or Episcopal church. Universities and hospitals usually generate higher operating surpluses from tuition and patient revenues than from donations.

Third, this proposal was attached to funding health reform. Feldstein is right that the proposal essentially transfers money from charities to the Federal government. These charities are exempt from federal and state taxes. A better way to see it is asking charities to pay a few percent in tax towards health reform.

The United States is insolvent in the long term if we don't get health reform done. Given the gravity of the situation, it's not too much a burden to ask. As related to the Episcopal Church, we want to see health reform done because of our commitment to the welfare of all people. If that means we need to run a slightly tighter ship, then let’s do so.

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