The Obama Double Tax Whammy

President Obama's proposal to provide only a 28 percent benefit for charitable contributions by top-bracket taxpayers is part of a double whammy, since he proposes at the same time to raise the top bracket from 35 to 39.6 percent.  The double-barreled increase/decrease reflects a two-part strategy that is much more than a simple tax increase.  Less civil society and more government power is the result.

Taken alone, an increase in tax rates would result in more charitable giving:  if one receives a 39.6 percent benefit from giving to charity, and one previously gave $1,000 at an after-tax cost of $650 (based on a 35 percent deduction), one can now give $1,076 at the same after-tax cost of $650. 

In addition, higher tax rates might increase charitable contributions even beyond that, since higher rates also have a psychological effect.  When the state and federal government together take close to 50 percent of the income of top-bracket taxpayers, those taxpayers increasingly prefer giving money to charity rather than sending it to government.  They may round the $1,076 contribution up to $1,250 (or higher):  in that instance, the $1,000 contribution that used to cost the government $350 turns into a $1,250 contribution costing the government $500. 

By simultaneously increasing tax rates to 39.6 percent and decreasing the tax benefits of deductions to 28 percent, the government can (a) eliminate the increased tax incentive for giving and thus protect its new revenue; and (b) at the same time, reduce the tax benefit for the giving already occurring and thus generate even more money for the government.  The government keeps its higher revenues that might be reduced by increased contributions, while the charities see existing contributions fall (since the tax cost to contributors of even the existing level of contributions increases).  There is an effective shift of money from private charity to government -- the exact opposite of what would occur if there were only a single whammy (an increase in tax rates). 

So the Obama plan hurts not only top-bracket taxpayers, but the charities themselves.  The administration has an answer to this, but as Jacob Sullum notes in "Obama's Charitable Taking," the response reveals the underlying philosophy behind the two-whammy  proposal:

In response to nonprofit organizations worried that limiting the deduction for charitable contributions will reduce donations, The Washington Times reports, [Budget Director Peter] Orszag "said Mr. Obama took care of that by giving charities government money to make up part of the difference." Orszag noted that "in the recovery act, there's $100 million to support nonprofits and charities." In essence, then, Obama plans to take money people otherwise would have given to the charities of their choice and give it to the charities of his choice.

The increase/decrease proposal will thus shift significant funds from charities chosen by taxpayers to government-chosen charities that are politically connected (or at least politically correct).  Charities that want to share in the increased government largesse will need to ensure that their goals and activities are the ones the government wants to support. Civil society is weakened and government empowered.

Taxpayers who might otherwise choose to opt out of the 39.6 percent tax -- by increasing contributions to charitable, educational, and religious institutions they want to support -- will thus find that exit strategy blocked by the 28 percent deduction limit.  Any increased contributions will necessitate an 11.6 percent toll charge to be paid to the government along with the contribution. 

Audacious, no?  If you are a taxpayer and think you can choose to support worthwhile charities instead of paying more money to the government, Obama is here to tell you:  no, you can't.  If you are a charity and think that, as a private institution with private support, the government cannot affect the direction of your activities, Obama also has a response:  yes, we can.

Gregory V. Helvering is the pseudonym of a tax lawyer who has been practicing for more than 30 years.  See also his article "Spreading the Wealth and Killing the Goose" in American Thinker .
President Obama's proposal to provide only a 28 percent benefit for charitable contributions by top-bracket taxpayers is part of a double whammy, since he proposes at the same time to raise the top bracket from 35 to 39.6 percent.  The double-barreled increase/decrease reflects a two-part strategy that is much more than a simple tax increase.  Less civil society and more government power is the result.

Taken alone, an increase in tax rates would result in more charitable giving:  if one receives a 39.6 percent benefit from giving to charity, and one previously gave $1,000 at an after-tax cost of $650 (based on a 35 percent deduction), one can now give $1,076 at the same after-tax cost of $650. 

In addition, higher tax rates might increase charitable contributions even beyond that, since higher rates also have a psychological effect.  When the state and federal government together take close to 50 percent of the income of top-bracket taxpayers, those taxpayers increasingly prefer giving money to charity rather than sending it to government.  They may round the $1,076 contribution up to $1,250 (or higher):  in that instance, the $1,000 contribution that used to cost the government $350 turns into a $1,250 contribution costing the government $500. 

By simultaneously increasing tax rates to 39.6 percent and decreasing the tax benefits of deductions to 28 percent, the government can (a) eliminate the increased tax incentive for giving and thus protect its new revenue; and (b) at the same time, reduce the tax benefit for the giving already occurring and thus generate even more money for the government.  The government keeps its higher revenues that might be reduced by increased contributions, while the charities see existing contributions fall (since the tax cost to contributors of even the existing level of contributions increases).  There is an effective shift of money from private charity to government -- the exact opposite of what would occur if there were only a single whammy (an increase in tax rates). 

So the Obama plan hurts not only top-bracket taxpayers, but the charities themselves.  The administration has an answer to this, but as Jacob Sullum notes in "Obama's Charitable Taking," the response reveals the underlying philosophy behind the two-whammy  proposal:

In response to nonprofit organizations worried that limiting the deduction for charitable contributions will reduce donations, The Washington Times reports, [Budget Director Peter] Orszag "said Mr. Obama took care of that by giving charities government money to make up part of the difference." Orszag noted that "in the recovery act, there's $100 million to support nonprofits and charities." In essence, then, Obama plans to take money people otherwise would have given to the charities of their choice and give it to the charities of his choice.

The increase/decrease proposal will thus shift significant funds from charities chosen by taxpayers to government-chosen charities that are politically connected (or at least politically correct).  Charities that want to share in the increased government largesse will need to ensure that their goals and activities are the ones the government wants to support. Civil society is weakened and government empowered.

Taxpayers who might otherwise choose to opt out of the 39.6 percent tax -- by increasing contributions to charitable, educational, and religious institutions they want to support -- will thus find that exit strategy blocked by the 28 percent deduction limit.  Any increased contributions will necessitate an 11.6 percent toll charge to be paid to the government along with the contribution. 

Audacious, no?  If you are a taxpayer and think you can choose to support worthwhile charities instead of paying more money to the government, Obama is here to tell you:  no, you can't.  If you are a charity and think that, as a private institution with private support, the government cannot affect the direction of your activities, Obama also has a response:  yes, we can.

Gregory V. Helvering is the pseudonym of a tax lawyer who has been practicing for more than 30 years.  See also his article "Spreading the Wealth and Killing the Goose" in American Thinker .