Peter Orszag, White House Budget Director
Is our budget proposal uncharitable?
Over the past 24 hours since we debuted the President’s FY 2010 Budget, some non-profits have argued that the Administration’s plan to limit the amount that high-income families (those with income of more than a quarter million dollars a year) can deduct from their taxes for charitable contributions will hurt these organizations – and do so at a time when these organizations’ resources are stretched because of the recession we inherited.
First, the proposed tax change would not be imposed during a recession (see my previous post
on that topic). Instead, it would begin in 2011 – at which point we expect the economy to be recovering.
Second, the money raised from the limits on itemized deductions would be used as part of the historic $634 billion reserve fund to fund health care reform. Reforming health care is essential to the long-term fiscal health of the country. Indeed, bending the curve on health costs is the single most important thing we can do to get our country back on a sustainable long-term fiscal path.
Third, there’s a question of fairness. Non-profits play a critical role in our society (indeed, I have worked at several of them in the past). But let’s look at how the tax code treats two different contributors to a non-profit. If you’re a teacher making $50,000 a year and decide to donate $1,000 to the Red Cross or United Way, you enjoy a tax break of $150. If you are Warren Buffet or Bill Gates and you make that same donation, you get a $350 deduction – more than twice the break as the teacher.
This proposal walks that difference back some of the way – it would limit the tax benefit for Buffet or Gates to $280. In other words, we are not eliminating the deduction – just reducing it to 28 percent (or $280 on the hypothetical $1,000 contribution) for the 5 percent of families at the very top of the income distribution. That is the same tax benefit that they would have enjoyed at the end of the Reagan Administration.
Will this hurt charities?
The evidence suggests that many factors affect charitable contributions, including the desire to help the charity and overall economic conditions. (The most recent example with changing the tax code illustrates that point. Between 2002 and 2003, the top income tax deduction for charitable contributions was reduced from 38.6 percent to 35 percent – and yet individual charitable contributions rose, presumably because other factors were a more important influence on giving than the change in the income tax.) Furthermore, about 75 percent of overall contributions would not even be affected by the proposed income tax change – because the contributions come from individuals who would not be affected or from corporations or foundations not subject to the individual income tax. Finally, even to the extent that charitable contributions are affected by tax considerations, the budget contains other proposed changes (including retaining an estate tax) which will create stronger incentives for giving. Above all, though, the best way to boost charitable giving is to jumpstart the economy and raise incomes – and the purpose of the Recovery Act enacted earlier this month was to do precisely that.
In other news, I will be appearing Sunday on ABC’s "This Week with George Stephanopoulos." So please check out the show on Sunday morning.