the WHITE HOUSEPresident Barack Obama

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Why Taking Tax Rates Off the Table Threatens Non-Profits and Charitable Giving

Summary: 
A new report by the National Economic Council shows that imposing a dollar cap on itemized deductions would effectively eliminate the charitable deduction for up to 13 million households and for as much as 60 percent of currently deductible giving.

Right now, America faces a series of critical fiscal choices that will affect the economy for years to come. One of the most critical steps we can take is to reduce the deficit in a balanced way in order to lay the foundation for long-term middle-class job growth. But we need to do that in a way that’s consistent with our values. 

As part of his balanced approach to reduce the deficit by $4 trillion, President Obama proposes to raise $1.6 trillion in new revenue over 10 years for deficit reduction, including $1 trillion from the expiration of the Bush high-income and estate tax cuts. The President’s plan asks the wealthy to pay their fair share by raising tax rates for the wealthiest 2% to the level they were at under President Clinton—39.6%—which was a time when we created 23 million new jobs.  It also prevents an income tax increase for 98% of Americans and 97% of small businesses. 

Some have suggested that, rather than raising tax rates for the most fortunate, policymakers should make up the revenue by cutting high-income tax benefits – in particular, by imposing a dollar cap on itemized deductions, including charitable contributions.

But what is clear is that proposals that take tax rates off the table would threaten donations to universities, non-profit hospitals, social services providers, arts and cultural institutions and other nonprofit organizations.  This is because – to make the math work – these proposals rely on hundreds of billions of dollars of revenue that would result from drastically cutting or eliminating the charitable deduction as we now know it.

Currently, the tax code encourages gifts to charity by allowing taxpayers to claim itemized deductions for charitable giving. But – as a new report by the National Economic Council (NEC) shows, the most prominent dollar cap proposals would effectively eliminate the charitable deduction for up to 13 million households and for as much as 60 percent of currently deductible giving.

Using Congressional Budget Office assumptions, the NEC estimates that a $50,000 cap would reduce charitable giving by about $150 billion over 10 years, while a $25,000 cap would reduce giving by about $200 billion. Even a $25,000 cap that applied only to high-income households would reduce giving by at least $10 billion per year. As the report discusses, a cap could impact nonprofit organizations in every sector and in every state.

The reality of the math means that taking tax rate increases, for the most fortunate, off the table forces a choice between virtually eliminating the charitable deduction for high-income households; raising taxes on middle-class families; or raising too little revenue for deficit reduction and forcing deep cuts to investments in research, education, and infrastructure or to other federal programs important to middle-class or struggling families.

This wholly unnecessary trade-off can be avoided by taking the President’s balanced approach. The President would raise $1 trillion by letting the Bush high-income and estate tax cuts expire. He would then raise additional revenue by limiting all high-income tax benefits to 28 percent.

Under the President’s proposal, every family that currently benefits from the charitable deduction would continue to receive a significant tax incentive for charitable giving. High-income households would receive the same incentive as households with incomes in the range of $200,000, the same incentive they received under President’s Reagan’s tax reform, and a larger incentive than they would get under Republican proposals to reduce the top tax rate to 25 percent.

Solving the Nation’s deficit and debt challenges will require that the highest-income households pay more. But under a more balanced approach that includes an increase in tax rates, this can be achieved without imposing major collateral damage on charitable giving and jeopardizing the vital work of those nonprofit organizations that serve the needs of millions of Americans.

Aviva Aron-Dine is a Special Assistant to the President for Economic Policy. Jonathan Greenblatt is Special Assistant to the President and Director of the White House Office of Social Innovation and Civic Participation.