Moving Past Charity
By MARC SEELINGER
April 2009
The Obama Administration has opened a new front in the war on prosperity, and it is coming to a charity near you. Obama’s proposed budget is reprehensible on several accounts. However, his policies regarding charitable contributions are economically misguided and morally bankrupt.
In the proposed budget, Obama increases the top tax bracket rate from 35 percent to 39.6 percent. This tax increase applies to anyone making more than $250,000 a year. Under the current tax code, the rate at which a person can deduct charitable contributions is directly tied to that person’s tax rate. For example, Joe Six-pack made $250,000 last year and gave $100,000 to charity. The government taxes him at a rate of 35 percent, but he can also deduct 35 percent of his $100,000 donation (which is $35,000) from his taxes. All else being equal, he will pay $52,500 in taxes.
Under the Obama plan, Mr. Six-pack will see his taxes increase to 39.6 percent, while the amount that he can deduct from his donation will fall to 28 percent. He will be able to deduct $7,000 less from his contribution (since he can now deduct $28,000) if his charitable contributions remain constant. He will also lose more of his income to taxes. So, under the Obama plan, Mr. Six-pack will pay $71,000 in taxes. This represents a 35.2 percent increase in Joe Six-pack’s tax payments.
This policy represents a significant change in the tax code and causes one to wonder at its intent. The administration claims that this will help pay for the “down payment” on universal health care coverage. The numbers from the White House claim that reducing this deduction will “save” (perhaps a better word here is “collect”) $179.8 billion over 10 years.
Now consider the present situation. The economy is in free fall. Unemployment is approaching levels not seen since the 1980s. Moreover, people are financially insecure and uncertain. Ignoring the fact that increasing the tax burden by 35 percent on the nation’s most affluent is probably not the best thing to do in the middle of a recession (just ask President Hoover how that worked), raising the cost of donating to charity is neither economically sound nor morally acceptable.
Now is the time that charities are most needed to help victims of the recession deal with unemployment and homelessness. As the recession has intensified, most charities are experiencing severe contractions in the amount of donations they are receiving. The Center on Philanthropy reports that 93 percent of professional fundraisers say the economy is having a “noticeable, negative impact” on their collections. The Center also reported that 47 percent of affluent households (i.e. those with incomes greater than $250,000) say they would give less if their tax deductions were reduced.
A study by the Indiana University Center on Philanthropy found that had Obama’s tax plan been implemented in 2006 (the last year for which tax data is available), giving from top earners would have decreased by 4.6 percent totaling nearly $4 billion. The study also found that for every 100-point drop in the stock market, there is a $1.85 billion decrease in annual giving. Considering the collapse of the market in the past 12 months, this results in a very significant decline in giving.
Now how is the Obama Administration attempting to justify this policy? On his blog, Peter Orszag, the Director of the Office of Management and Budget, provides some very enlightening comments. According to Mr. Orszag, “reforming health care is essential to the long-term fiscal health of the country,” and that this is “a question of fairness” because those who make less money are able to deduct less from their taxes than those who make more. But let us look at this.
A study commissioned by Bank of America on the trends of high-income households found that “a very small number of households have an enormously disproportionate impact on charitable giving.” This income group alone is responsible for over 2/3 of all household charity, with 98 percent of these affluent households making some kind of contribution. The study also found that the yearly average donation for households with incomes greater than $250,000 was $120,651, nearly 50 percent of their gross income.
Just as an aside, Obama’s average giving for the last seven years comes out to $21,000. However, if you discount 2005-06 (after he starting running for President), his average yearly giving was $2,154 a year, which comes out to less than 1 percent of his income. Joe Biden’s average giving comes out to $369 a year, less than 0.143 percent of his income. Both of these gentlemen have incomes well above $250,000.
But back to the question of fairness. These statistics show that those with more money donate more money and a greater percentage of their income to charity than those who make less. These people are also paying higher taxes than those with smaller incomes. What is not fair is to increase their tax rate and reduce the size of the deductions they can take.
Obama and his people also attempt to justify the policy by comparing it to past changes in the tax code. Geithner claims that this new policy will restore the same deductions that were in place when President Reagan left office. Orszag points to the period from 2002-03 as a period where the top deduction was reduced from 38.6 percent to 35 percent.
However, in both of these cases, the reason the deductions fell was because they were tied to the income tax rate. In the case of Reagan, he slashed taxes across all income levels. The period from 2002-03 is the first year that the Bush tax cuts went into effect, lowering the top income tax rate to 35 percent. These were not arbitrary reductions in the deductions rate. Taxes were cut and so were deductions. This is a classic example of a false analogy. What Obama is proposing is to raise taxes and reduce deductions. In the other two cases, both taxes and deductions went down.
But what are the charities we are talking about? Where is all the money from these rich fat cats going? The Bank of America study found that only 22 percent of deductions from affluent households go to religious charities. The study found that there is a wide dispersal in ways that the wealthy donate their money. Many give to the Red Cross, the Boy Scouts, or ACORN.
Others contribute to institutions of higher learning (i.e. UNC). Approximately 20 percent of UNC’s annual budget comes from private donations. These donations touch every aspect of campus life, from merit and need-based scholarships, to research and teaching grants, to support for the school’s athletic teams. So, when Obama, in his rage against the rich raises their taxes, reduces the deductions they can take and increases the cost of donating, he launches an all-out assault on private charity.
This situation hits directly home, as we are all beneficiaries of private charity in some way or another. Not only is he stealing food from the mouths of starving babies and dooming cancer-stricken children to slow and painful deaths with no hope of recovery, he is also stealing your scholarship money, depriving your professors of grants and fellowships, robbing other students of the opportunity to attend college, and stripping the Men’s basketball team of the opportunity to compete in the NCAA Tournament.
He is denying health care, food, and education to millions across the country. Obama is stifling innovation by cutting off access to research grants, fellowships and internships. He is denying an entire generation the opportunity to use their talents, skills and abilities, to advance societal and cultural understandings, expand the frontiers of knowledge and improve the world in which they live. The moral dimension of this issue cannot be understated. By cutting of the major lines of funding to this nation’s charities, Obama is willfully and deliberately crippling this nation and its ability to lift itself out of this recession. But to what end?
Included in the budget proposal is a provision in which the government will provide financial assistance to the nation’s charities. Total aid comes out to $100 million, which is a mere drop in the bucket when Obama is planning to take an additional $18 billion out of the economy every year. But there is more than just that. What is happening here is a process in which government aid will supplant private aid.
By crippling the country and destroying the current system of charitable aid, Obama has created a strategy whereby everyone becomes dependent on him for their health and livelihood. He is orchestrating a financial crisis for the charities to either destroy or co-opt them so that he may come sweeping in with more government aid and programs, appearing to all the world as the savior of the American people.
In actuality, he is enslaving the people in their dependence on the government and destroying their capacity to improve their own lives. Eventually, we are left with a scene from “1984,” with the people holding their arms crossed over their heads chanting “Big Brother!”
In short, Obama’s plan to tax the rich and reduce their deductions is misguided and immoral. In raising the costs of donation for the nation’s biggest and most affluent donors, he is placing additional financial strain on the charities. In attacking the charities, he is destroying the capacity of the people to help themselves and making them dependent on the government for their happiness. We are told that of faith, hope, and charity, the greatest of these is charity. However, in Obama’s America, the audacity of hope is launching an all-out war on charity.