Six Myths: What You Think You Know about President Obama’s Plan to Reduce Charitable Deductibility

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During the initial debates around President Obama’s plans for national health care reform, one topic of tremendous controversy was the proposal to limit charitable deductions for very wealthy households.  Ostensibly, this would have somewhat reduced losses to the federal treasury, thereby increasing the pot of federal revenues that could help finance elements of the health reform package. The idea wasn’t greeted kindly by representatives of either party and did not progress. 

Now the president has floated a similar plan in his proposed fiscal year 2012 federal budget, generating a similar hue and cry from some segments of the nonprofit sector.  Like the proposal from 2009, President Obama’s plan is shrouded in myth and misinformation. Below, we’ve listed six of those myths, with explanations that move them from the realm of the Brothers Grimm to something closer to empirical fact. 

The President is aiming only at charitable deductions

This is the way the debate often occurs in the nonprofit sector’s discourse, but it isn’t true.  The president first proposed to cap the deductibility of itemized deductions in the midst of the health care debate, and has revived it again now. His proposal would cap the mortgage interest deduction, the federal tax deduction for state and local taxes, and the charitable deduction at the 28 percent tax level for taxpayers in the next two higher tax brackets (who pay taxes at the 33 and 35 percent levels).  You would swear by the headlines that President Obama holds some special animus toward charities and charitable givers. 

The deductibility of mortgage interest has long been discussed. Unlike charitable giving, whose deductibility as a concept almost no one debates because of the charitable beneficiaries, mortgage interest deductibility has long been questioned as an inherent and unfair subsidy to homebuyers over renters and higher income people over people who cannot afford the burdens of homeownership. In fact, the mortgage interest deduction generally goes to families who would be homeowners with or without the deduction and there is no evidence that the deduction actually induces more homeownership. The President’s current proposal on all deductible items aims toward increasing tax fairness in general, not in specifically picking on charitable givers.  

The cap will affect all charitable donors

Hardly. The cap is only for taxpayers with individual incomes of over $200,000 and households with combined incomes of $250,000. What it means is that for taxpayers in those brackets, their deduction of a dollar donated to a charity will be worth 28 cents rather than 33 or 35 cents (or more if tax rates rise). Will the sacrifice of a nickel or dime of deductibility by the very affluent change the behavior of itemizing donors at the 28 percent brackets or less? There will be absolutely no impact on their tax payments. 

But in the news coverage, the information about the limited tax brackets affected by the president’s proposal is sometimes a bit buried, so the casual reader might think that all charitable giving is being “disincentivized” – if it constitutes much of a disincentive at all. Or maybe it is the problem endemic in the U.S. of families identifying with the income levels they want to be (or hope they will be) rather than where they currently are. 

Charitable giving will be slammed

While economists debate the matter, the overall numbers are pretty clear that the impacts will be small, in low single digit percentage points at best. The willingness of opponents to describe the impact as “devastating” seems more a matter of advocacy messaging than empirical analysis. During the health care reform discussion of the itemized deduction cap, NPQ noticed that one national nonprofit association leader declared in an online discussion that he had done some “back of the envelope” calculations to determine that the impact on charitable giving would be huge. At that point, one of the speakers, Bob Greenstein of the Center for Budget and Policy Priorities, ripped into him for the phony calculations and unveiled the range of estimates that were at best small.

The Center for Philanthropy at the University of Indiana originally predicted that the reduction in charitable giving might be in the range of one to two percent.  Interesting of course is that the original proposal two years ago would have helped finance health care for the poor and middle class, costs that are currently borne by charitable giving as uninsured people show up in nonprofit clinics and emergency rooms looking for charity care. The costs that would be covered by the increased revenues going to the federal government might have more than compensated for the sacrificed pieces of donations that would have been lost to the cap, but somehow, that didn’t figure into the critics’ sometimes disingenuous calculations.

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Take the other argument, that a good chunk of wealthy families would cut back on their giving if there were zero charitable deductibility.  Besides revealing that people give expecting some tax benefits from charitable donations, the notion is wrong because the president isn’t proposing zero deductibility or a flat tax. That’s actually a long time Republican notion. He is simply arguing for increased fairness in deductions. The  United Way’s Brian Gallagher argues that very affluent taxpayers “give generously and they readily accept their civic responsibility through contributions to charity.”  It is hard to imagine that all wealthy taxpayers contribute equally, much less to social issues, as opposed to many charities that may be self-serving, like high-end universities and private schools. President Obama is giving them a 28 percent deduction for their donations to any 501(c)(3)s (or churches) they want to support,  suggesting that that number is generous enough. 

Charitable deductions have never been capped before

Oh really? It is pretty amazing how little history is applied to public policy debates. The last leftwing president who capped charitable deductibility was the well-known radical Ronald Reagan. In the 1980s, according to Leonard Burman of Syracuse University, there was a cap, but according to National Public Radio, “Then, as now, nonprofits feared the worst. But overall giving stayed about the same.” Actually, a reduction in top deductibility occurs every time tax rates are lowered for the very wealthy. Think back to 2002-2003, when the top tax rate was lowered from 38.6 percent to 35 percent.  The Obama Administration has pointed out that charitable donations actually increased as a result

Remember that there is another high-end donor cap, that cash deductions are limited to 50 percent of taxable income. Why? Because it would be silly and unfair to allow ultra wealthy donors to virtually escape taxation by making charitable donations rather than contributing like the rest of us to the nation’s treasury. 

All of charity will lose

It is easy to see who is fretting the most: the large arts, higher education, and medical institutions that fear that their high-end donors might tighten their wallets somewhat. We are talking about high net worth donors here. If there is a small reduction in their charitable giving, it is most likely to be seen in certain sectors.  For example, according to the Bank of America survey of high net worth donors, 70 percent give to arts institutions compared to 8 percent of all charitable donors.

But lots of different charitable subsectors have imagined themselves as losers in this calculation, including religious institutions.  

Opponents are trying to suggest that the cap will impact human services the way it would impact the arts, but there is absolutely no evidence for that. But expect the continuing apocalyptic argument that capping the deduction will “kill” arts organizations such as symphonies. 

This is the wrong signal at the wrong time

This could be the most telling argument. Since deduction of mortgage interest payments are also on the docket, the real estate brokers’ and homebuilders’ industries are using many of the same arguments about the purportedly devastating impact on the homebuilding industry, even though the mortgage interest deduction has long been a target of advocates of tax fairness, since it primarily benefits an income level of taxpayers that skews just as high as the charitable deduction.

But they are raising a symbolic issue, that by reducing the mortgage interest deduction, the federal government is signaling a lower level of commitment to the concept of homeownership, a retreat from decades of federal initiatives to raise homeownership levels across the nation. 

Does capping itemized deductions have a specific symbolic message for charitable giving? If the president were specifically aiming at charities and not all itemized deductions, perhaps, but that is nowhere in the president’s calculus.  His administration strongly supports nonprofits through the Corporation for National and Community Service, HUD, Health and Human Services, and the Department of Education.  While one might debate the efficacy of Obama Administration policies such as the Social Innovation Fund and the Promise Neighborhoods program, an argument that he is trying to send a negative signal about charitable giving through the itemization cap is not justifiable. 

Will the president’s proposal pass? It is hard to say. It is under attack as a tax increase on wealthy people and an attack on charities. Although wealthy people typically say that they give to charities out of selfless idealism, some donors –or perhaps some charities that pitch to high income donors – are concerned that the capped deductibility will lead to lower generosity. 

But as it currently stands, all of us are subsidizing the giving of the wealthy. When that wealthy donor contributes, say, $100,000 to his or her son’s or daughter’s private school and gets a 28 percent deduction, the taxpayer’s taxes are reduced by $28,000. In other words, the federal government – or the taxpayer – has matched the donor’s choice of charity with $28,000 of foregone tax revenues. President Obama is willing to have us all provide that taxpayer a $28,000 match, but not $33,000 or $35,000. 

Will the president succeed?  When he had a Democratic majority supporting him in the House, there was a small chance, but Democratic members of Congress found themselves hard-pressed to stand up and defend the proposal. Now that the majority has shifted to the Republicans, it is hard to imagine that high-end charities won’t use their influence to defend the maximum deductibility afforded to high end taxpayers. Even if they didn’t, the mortgage interest deduction defenders such as the National Association of Home Builders have characterized the itemized deduction cap as an “attack on the middle class,” with some knowledgeable observers declaring the likelihood of the president’s success as a “fat chance.” The mortgage interest deduction according to most economists doesn’t do a thing to increase homeownership rates, but that won’t stop the real estate sector from attacking and killing the proposal. 

If the president’s proposal fails, along with much of the rest of the fiscal year 2012 budget, that might be the impetus to stop tinkering on the edges and examine a major change along the lines proposed by the president’s bipartisan tax commission, which suggested converting the charitable deduction  to a 12 percent tax credit for taxpayers who had donated above a specified minimum amount. But the commission’s proposal was virtually DOA after the two chairs, Alan Simpson and Erskine Bowles, issued their report. Charities took a deep breath about circumventing that debate. It might rise from the dead if the president’s itemizer deduction cap doesn’t work.

  • Michael J. Rosen

    Rick, you’re wearing your politics on your sleeve. When you suggest that a tax deduction is somehow a payment from the government, you’re barking the hard-left line. Tax deductions simply allow people to keep their very own money. A tax deduction is not a payment from the government. To be sure, a reduction in tax payment from one could mean the need for more taxes to be collected from others. However, that is not a given. The government could cut real expenses. Again, your aparent lefty orientation keeps you from suggesting that alternative. (For the record and in the interest of full disclosure, I’m a moderate Democrat who voted for Obama.)

    The part of your article that I found even more interesting than what it revealed about your political orientation is the paradoxical suggestions that the nonprofit sector will likely see a one to two percent drop in contributions while also suggesting the sector would not be hurt. At this time, many nonprofit organizations are feeling great pain. For many, contributions have already shrunk while the demand for services has increased. Even in the arts world, many are struggling; for example, The Philadelphia Orchestra has actually declared bankruptcy! Any further drop in charitable contributions will have some kind of negative impact.

    The government should be doing more to encourage more charitable giving not less. Even if I accept everything you’ve stated at face value, the Obama plan will result in some sort of decline in chartiable giving. That’s not good.

  • Kelly Kleiman

    Rick, Brilliant analysis based on solid research, as always. I weighed in on the same subject with much less rigor but with the same general inclination. The charitable deduction shouldn’t be the only thing on the chopping block–and, as you note, it’s not–but it also shouldn’t be exempt from review and reform.


    Why do the pessimists cloud everything President Obama says or does with negativism? The world is tired. Give us a break. The President has the best intentions not just for America but humanity as a whole!
    Charles Otwori,
    President/CEO, Ketimawa Eastern Africa(Consulting)LLC, Nairobi, Kenya

  • Robert Sharpe

    As Rick correctly points out there have always been limits on the amount that Americans could voluntarily transfer for charitable purposes without payment of federal income tax on that amount.

    The original limit was 20% when the charitable deduction was introduced in 1917. The idea underlying the charitable deduction was not to encourage or subsidize charitable giving, it was to recognize the fact that it was not thought to be good social policy to impose tax on amounts given to charity.

    What the new proposals will do is just that – impose a tax on amounts given by the higher income taxpayers for charitable purposes. Keep in mind also that those affected by this proposal would include the average police captain married to a nursing supervisor in New York City. The impact would vary by geographic location and local salary levels for the same occupations. Whether or not your gifts were subject to tax would thus depend to a large extent on where you live.

    Will this affect the amount of charitable giving in America? Some say yes, some say no. Before forming an opinion on that question, consider the following.

    When a person earns a dollar, there are only a few things that can be done with that dollar. First, tax will be due to a greater or lesser extent. After payment of tax, the remainder can be spent for personal needs, saved, or given to charity or noncharitable recipients such as family members. If the amount paid in tax goes up, then there is less for the other needs. A person must then reduce personal spending, savings, or gifts to family or charity.

    If the amount given to charity is also fully or partially subject to tax, then that further reduces the amount available for other purposes, leading to a recalculation of the amount one can “afford” to give and a vicious mental cycle then ensues.

    For example, suppose someone who makes $500,000 would like to give $100,000 to a food bank. Under current law, that person writes a check for $100,000 and no tax is due. Under the administration proposal, in addition to the $100,000 cost of the gift, the taxpayer would also have to write an additional check of up to $11,600 (if the 39.6% braket is restored as proposed) on top of the gift amount.

    In order to keep the cash outlay at $100,000, a rational actor would be advised to reduce the gift amount to approximately $90,000 and hold back theh remaining $10,000 to pay the new tax due on the $90,000. Otherwise the donor will have to reduce other spending or saving by $11,600 to “make room” to pay the tax on the $100,000.

    Let’s just be honest about this. What is proposed is a targeted tax increase on charitable gifts by upper middle income and above Americans. Whether this is a good idea or not is a matter of opinion.

    If we want to tax the wealthy, why don’t we start with hefty sales taxes on private jets and the fuel they burn. Why not charge an annual license fee of 10% of the value of a $100 million yacht? Why not impose a federal property tax on residences worth over a certain amount. In Singapore a BMW that costs $50,000 in the U.S. will set you back about $250,000. The difference represents taxes to support public transportation.

    But no, let’s start by taxing the most generous among the wealthy rather than the most profligate spenders and luxury goods.

    I am unaware of any taxes imposed on charitable gifts by the Reagan administration and would be interested in learning more about that. What the Reagan administration proposed in its Treasury I document in 1984 was to allow deductions only for gifts in excess of 2% of adjusted gross income. Do you suppose they knew that the average American gives 2% of income to charity and this proposal would have the affect of only giving tax benefits to the wealthy. The tax credit proposal Rick mentions would do the same. It would only apply to gifts in excess of a relatively high threshold of AGI and thus only benefit the wealthy.

    Rick mentions private schools. If the real issue is whether food banks and private schools should be “subsidized” equally then lets address that question directly rather than impose blanket limits on deductions.

    Those reading this should go to the “donate” button on this website and they will find that the Nonprofit Quarterly actively seeks donations and informs donors that their gifts will be tax deductible. Should the Nonprofit Quarterly should receive the same “matching gift” from the taxpayers as a food bank or a shelter for battered women? Maybe that is the real issue here.

    The mortgage interest deduction is NOT the same as the charitable deduction and they should be addressed separately. Maybe we should start with eliminating tax deductions for interest on mortgages for second or third homes rather than tax charitable gifts.

    No one knows what the impact of such a tax would really be. We do know, however, that taxpayers with incomes over $200,000 make 46% of the gifts that are deductible for federal income tax purposes. Whether increasing the cost of those gifts through imposition of a new tax will lead to reduction will amount to societal experiment the outcome of which no one knows.

    The issue is whether or not now is the time to find out.

    For more on the impact of this proposed tax increase, see

    Robert Sharpe

  • Richard Shaw

    Thank you Robert for your clear and compelling thoughts.

  • Stellar Schwartz

    Michael Rosen,
    Well stated and I totally agree with you.