The voices of Tax Policy Center's researchers and staff
A few more thoughts on the president’s plan to limit the value of itemized deductions to 28 percent. First, if you’re in a panic that it will kill philanthropy, home building, and life as we know it, relax. It won’t. In 1981 the maximum value of itemized deductions fell from 70 percent to 50 percent. Between 1986 and 1988, the top bracket fell almost in half, from 50 percent to 28 percent. Still, people kept donating to charity and buying homes. Taxes affect behavior, but they are only one factor among many. The president’s proposal would not be a disaster.
On the other hand, a reader has pointed to some reasons why the proposal might have more of an effect on charity than I suggested in my post. His argument: there is an “income effect” on giving. The president’s budget would raise taxes on high-income taxpayers by about $955 billion over ten years. Since charitable contributions grow with income, that could translate into a significant drop in philanthropy.
The reader also questioned my argument that because some charitable gifts come from foundations and bequests, the effect of giving would be blunted. But, to the extent that foundations get their money from individuals—and the proposal is likely to depress such individual giving—foundation giving could also fall.
My commentator also notes that, under the president’s proposal, the estate tax will be cut compared with current law, reducing the tax incentives to make gifts and bequests. Under current law, the first $3.5 million of estates is exempt from tax and amounts above that level are taxed at a 45 percent rate. In 2010, the estate tax disappears entirely, and starting in 2011, those who survive the one-year “death tax holiday” will be subject to tax rates up to 60 percent on estates over $1 million. President Obama proposes to make 2009 law permanent avoiding both the tax holiday in 2010 and the tax increase in 2011. While the proposal is eminently more sensible than current law, the diminished tax starting in 2011 might induce fewer gifts and bequests.
Finally, different charities might be affected differently. Charles Clotfelter has pointed out that the Tax Reform Act of 1986 likely had uneven effects on charities. High income donors give more to education, health, and the arts so raising taxes on big earners might disproportionately hurt those parts of the philanthropic sector.
And the higher tax comes at a time when endowments are taking a brutal beating. While Harvard, the Mayo Clinic, and the Metropolitan Museum of Art will likely make it through the crash okay, smaller, less well endowed institutions could suffer the double whammy of shrunken endowments and fewer donations. On the other hand, the local church or food bank may not suffer much from capping the deductions.
But here’s one more reason not to worry about the proposal: It’s not going to happen. The entire philanthropic world, realtors, and homebuilders mobilized instantly to kill the proposal. It is dead.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.