Architect of Two Percent Deduction Cap Makes Charitable Exception

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March 12, 2013; Source: Washington Post

The last time that conservative economist Martin Feldstein weighed in on tax deductions, he caused a near panic in the nonprofit sector, at least among those that were actively negotiating to ward off President Barack Obama’s proposed 28 percent cap on itemized deductibility. In 2011, the former chairman of the Council of Economic Advisors for former President Ronald Reagan argued for a hard cap of two percent of a taxpayer’s adjusted gross income as the most a taxpayer could claim as itemized tax deductions. Feldstein suggested that this cap on how much a taxpayer’s taxable income could be reduced by deductions and exemptions would limit “the total tax benefit and not any particular tax reduction.”

Nonprofit observers viewed this as a means of pitting the charitable deduction against others in terms of fitting within the proposed two percent cap. These observers worried that the charitable deduction, which is based on the discretionary decisions of a taxpayer to make donations, would likely lose out to more automatic, pre-calculated deductions, such as the mortgage interest deduction and the state and local tax deduction. At the time, the nonprofit sector’s reaction might have been a little overblown, as President Obama had lost on his proposal for the second time around and no one was talking in terms of a hard percentage or dollar cap (at least until Republican presidential candidate Mitt Romney floated the notion of a hard dollar cap in his 2012 debates with President Obama). But Feldstein’s role as an advisor to members of (and candidates for) Congress could be construed as making his comments more noteworthy than your typical op-ed or National Bureau of Economic Research working paper.

As such, we note that Feldstein returned to the topic this month with an op-ed in the Washington Post, but his two percent cap proposal has been modified. The text of this op-ed is pretty similar to his piece in the New York Times two years ago, except for one thing: “This cap should be applied to all deductions except the one for charitable contributions. The full deduction for charitable contributions should be retained, because the money that taxpayers give to charity benefits those organizations rather than the individual taxpayer.”

The change is striking in one particular way. The language Feldstein uses to distinguish the charitable deduction from other deductions tracks the talking points that lobbyists for the nonprofit sector have been testing, using, and honing for at least the last six months to a year. Whether or not one believes in keeping the charitable deduction sacrosanct, the messaging and lobbying success of the nonprofit coalition must be acknowledged. Feldstein’s new language is similar to Sen. Orrin Hatch’s (R-Utah) language last fall in the Senate Finance Committee hearings on tax reform. By and large, it is language that most members of Congress and their staff have adopted, especially since there is no visible, vocal champion on Capitol Hill for President Obama’s 28 percent proposal.

The way Congress operates is arcane, especially now that tax reform debates are in the hands of a small number of congressional leaders meeting largely behind closed doors. In the grand scheme of tax reform, the deduction still could be impaled, but it is hard to discern who would sponsor such a move. —Rick Cohen