Last week, National Public Radio interviewed me for a report about the various proposals floating around Washington, DC concerning the charitable gift tax deduction. While no specific legislation to reform the tax system has been presented in Congress, Capitol Hill watchers expect major overhaul legislation to be introduced sometime this year. Normally, I’ll only blog once a week. However, this week I want to address the charitable gift deduction issue, and the subject is just too big for one post. So, I’ll be blogging throughout the week on the topic. I’ll address the issue in the following parts:
- Taxes Part 1: What is the Federal Government up to?
- Taxes Part 2: Proposals to eliminate or reduce the charitable gift deduction
- Taxes Part 3: Proposal to replace the charitable gift deduction with a tax credit
- Taxes Part 4: Why have a charitable gift tax deduction?
- Taxes Part 5: What should the nonprofit sector do?
Taxes Part 1: What is the Federal Government up to?
The Obama Administration and members of Congress have been talking for months about the need to reform our tax system. President Obama appointed Erskine Bowles and Alan Simpson as co-chairs of the bipartisan National Commission on Fiscal Responsibility and Reform. The Bipartisan Policy Center’s Debt Reduction Task Force, co-chaired by Pete Domenici and Alice Rivlin, is a nonprofit organization that has also put forth its own recommendations. Both groups are recommending drastic changes to or elimination of virtually every tax deduction including the one for charitable giving. So, what are they up to?
The U.S. Federal Government has long been guilty of runaway spending. As of Feb. 2011, the national debt is over $14 trillion! Finally, the Federal government seems to understand that the country cannot keep piling on more debt. There are only two ways to address the debt situation: 1) Cut spending, and 2) Raise more tax revenue. The reality is that solving the debt problem will probably require both spending cuts and tax increases. To date, Congress seems to be avoiding major budget slashing and, at best, is simply nibbling at expenses. So, it’s not a surprise Congress and the Administration are looking at a major tax hike. However, they’ll never come out and admit that because it would be too politically costly to do so.
At least one of the tax overhaul proposals would drastically reduce tax rates. Rates would be reduced to 8% to 23% versus today’s range of 10% to 35%. That sounds great, doesn’t it? However, while it sounds like a proposal to lower taxes, it would really result in most people paying more taxes because of the corresponding proposal to eliminate or reduce tax deductions.
The tax overhaul proposals are an example of the Federal Government at its most insidious and cynical. Both Democrats and Republicans would like to raise tax revenue. I suspect they think it’s easier to raise taxes than cut spending. To get Democrats on board, elimination or reduction of tax deductions has been proposed. That would allow Democrats to tell their base of support that they have brought “fairness” to the tax code by reducing or eliminating deductions for the so-called “rich.” To get Republicans on board, the proposed overhaul involves a major reduction in tax rates. That would allow Republicans to tell their base that they have lowered tax rates. Both sides will do everything possible to avoid telling voters that they are really increasing their tax burden. Unfortunately, this is likely to be our future.
If taxes go up significantly, people will have less net income. Research shows that when people have less net income, they give less. So, regardless of which charitable deduction plan is adopted, if any, an increased tax burden will negatively impact philanthropy. Furthermore, a hefty tax increase would likely have a negative impact on Gross Domestic Product. So, even if philanthropy remains at about 2% of GDP, charitable giving will suffer as GDP growth remains sluggish or slides into negative territory.
Congress and the Administration are not likely to single out the nonprofit sector. Instead, the sector is likely to experience some collateral damage as Democrats and Republicans team-up to find crafty ways to increase taxes. That’s what Michael Rosen Says… What do you say?