How Will the Perry and Cain Flat-Tax Schemes Impact Charitable Giving: With Confusion

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October 25, 2011; Source: The Atlantic Wire | A month or so ago, Texas Governor Rick Perry was the ascending star of Republican voters. Now, it is Georgia businessman Herman Cain topping the always-consistent Mitt Romney in the polls.

Cain and Perry have something in common besides their party registration. As of this week, with Governor Perry’s announcement, both are flat-taxers. Cain’s proposed “9-9-9” tax plan is a kind of flat-tax concept, and now Perry has made a flat tax proposal himself in the hope that his pitch will resonate with the same public that has boosted Cain into the top tier of candidates.

In theory, a flat tax basically wipes out loopholes and deductions—like the charitable deduction. How flat are Perry’s and Cain’s flat tax ideas? Cain’s nines refer to three components of his simple alternative to the current tax structure:

  1. Replace personal income taxes and the payroll tax with a flat 9 percent individual income tax
  2. Replace the corporate income tax with a 9 percent business flat tax
  3. Replace estate and excise taxes with a 9 percent sales tax

Perry’s slightly more confusing flat tax offers individuals and corporations a 20 percent tax rate. Why is Perry’s flat tax confusing? One reason is that his flat 20 percent rate is an option: taxpayers can either go with the 20 percent rate or opt out in favor of the federal tax rate they would have had under the current system. Corporations will also find their rates lowered to 20 percent, but Perry has called for another corporate tax rate of 5.25 percent for profits repatriated to the U.S., which he thinks will lure corporations back stateside.

Although muddled in other areas, Cain’s tax plan is clear on charitable deductions. For individual taxpayers, the 9 percent tax is assessed against “gross income less charitable deductions”, presumably meaning, with no other explanation from the Cain campaign camp, that taxpayers can deduct charitable giving without limitation against their taxable income. Charities might not be quite so happy with both the elimination of the Earned Income Tax Credit, which helps very low-income families, and Cain’s sacking of the estate tax, which spurs some measure of charitable bequests. Since first chanting the 9-9-9 slogan, Cain has unflattened the proposal somewhat, calling it a “work in progress” and adding modifications concerning what might be exempt from the sales tax, for example.

Do note that Cain’s identified economic advisor is one Rich Lowrie, who is a wealth advisor in a division of Wells Fargo. Besides being a longstanding acolyte of the conservative organizational icons the American Conservative Union and Americans for Prosperity, Lowrie also lists himself as a fundraising advisor for the Ted Ginn Foundation, aimed at helping at-risk youth. So presumably, Lowrie knows something about charity and fundraising.

Perry’s plan allows for deductions for charitable giving as well as for home mortgage interest and state and local taxes, but only for families earning less than $500,000 annually, and it more than doubles the standard deduction—which presumably applies to non-itemizers—to $12,500 for individuals and dependents. Perry’s tax reform appears explicitly linked to the federal budget—which he says should be limited to 18 percent of Gross Domestic Product compared to the 23.8 percent of GDP that the federal budget consumed in 2010—and to the repeal of the Affordable Care Act, the Dodd-Frank financial oversight reforms, and the Sarbanes-Oxley restrictions on corporate accounting and accountability.

So what can nonprofits expect from the two flat-taxing candidates in the Republican field? Both retain some form of tax incentive for charitable giving in their tax reform plans; neither in any way suggests that he would ditch the deduction. How would their modified flat tax proposals specifically affect nonprofits and charitable giving? Nonprofits would face more of a challenge from the intellectual muddle of the two tax reform proposals than from any specific policy on charitable giving.—Rick Cohen