Decrease in Tax Deduction Could Not Come at a Worse Time

By Rick Dunham of member firm Dunham+Company

The Obama administration’s 2012 budget calls for a decrease in the charitable tax deduction. Even more alarming, the Debt Reduction Task Force from the Bipartisan Policy Center recently suggested eliminating this deduction completely.

These proposals couldn’t come at a worse time.

Research shows that 2011 could mark the beginning of a comeback for charities.  For the first time in four years, Americans say they are more likely to increase their giving than decrease it, according to the Dunham+Company New Year’s Philanthropy Survey.

Charity is more than an economic transaction; it goes to the heart of who we are as a people.  Our system makes the voluntary support of charities a moral priority.

But if the system changes, we could see the demise of the strongest charitable sector in the world … and the comeback for charities could be short-lived.

The administration wants to cap the charitable deduction at 28 percent for individuals making more than $200,000 and for families making more than $250,000. In the philanthropy survey, Americans indicated that the deduction is a significant motivator in giving, with roughly one in two households (48 percent) saying the deduction is important to their giving decision.  The higher the income, the more important the deduction, with two out of three high-income households saying the deduction is important, a finding supported by the Center on Philanthropy.

These households form the backbone of charity.  Based on the most recent IRS and census data,   households making more than $200,000 represent about 3 percent of the population. But they also make up almost half – $78 billion – of the $164 billion claimed as charitable deductions.

Capping the deduction would decrease support to charity, with the impact being felt acutely in 2013, after the Bush tax cuts expire and the top tax rate rises from 35 to 39.6 percent for top earners.  The Center on Philanthropy in 2009 estimated that allowing this tax jump and capping the deduction at 28 percent would decrease charitable gifts by 2.1 percent.  That’s $5 billion.

The non-profit sector is vital to our economy, representing five percent of the GDP — larger than the airline industry.  A decrease in support will mean jobs will be lost.

Rather than decreasing the incentive to support charities, the administration should partner with non-profits to more effectively deliver the hundreds of billions of dollars in welfare services in Obama’s budget.  And it should provide an incentive to high-income families to give even more generously to support those services.

In fact, the United Kingdom’s new government is considering such an incentive for high-end earners to stimulate greater support for charities as it cuts welfare programs.

The Debt Reduction Task Force wants to replace the charitable deduction with a 15 percent credit to charities, mirroring a program called Gift Aid in the U.K., where per capita giving is roughly one-fourth what it is in this country. If the U.S. had U.K. levels of giving, it would equal around $84 billion per year, compared to the current $305 billion.

That would be devastating to charities — and to those who rely on their services. At a time when we desperately need smaller government, it would add to the bureaucracy.

Our charitable deduction ensures that the wealthy have an incentive to share their financial blessings with the less fortunate. These donations support health care for the sick, social services for the needy, education for the young, funding for the arts and compassion for a hurting world.

If we move away from this system, we place our charitable sector – and our soul as a country – at grave risk.

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