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Going After Tax Deductions for Charity

Wednesday September 14th, 2011   •   Posted by Craig Eyermann at 2:30pm PDT   •  

In 2009, Americans reported nearly $34.9 billion worth of donations to private charities serving the public interest on their federal tax forms, as they claimed the federal government’s tax deduction for charitable contributions on their taxes.

Of all these donations, $19.14 billion, or 54.9%, were made by taxpayer households that reported $200,000 or more in annual income.

Amount of Tax Deductions for Charitable Contributions for Various Income Ranges, 2009

Needless to say, that’s a lot of money that President Barack Obama believes would be better spent by the U.S. government in the form of spending controlled by elected U.S. politicians who would receive political benefits from it, which is why the President has repeatedly proposed cutting or eliminating the charitable contribution tax deduction for Americans who earn high incomes, and now calls for it specifically to support his latest economic “stimulus” attempt: the American Jobs Act.

Prior to his new “jobs” initiative, the President most recently went after the charitable contribution tax deduction in his original budget proposal for the U.S. government’s 2012 fiscal year, which could limit the amount of a tax deduction for high income earners by up to 30%. Using the most recently available tax return data for 2009, the chart below shows the approximate distribution of charitable contributions by annual income along with the estimated impact of the President’s ambition

Approximate Aggregate Amount of Tax Deductions for Charity for Each $500 Increment of Income, 2009

Using 2009 data and assuming that if not for the tax deduction for charitable contributions that Americans earning high incomes would not be able to donate as much money to private charities, we estimate that the potential effect of the President’s FY2012 budget proposal would affect up to $1.9 billion of charitable contributions, or 5.4% of the total.

We also estimate that if the President’s proposed reduction of the tax deduction for charitable giving were extended to include the donations of taxpaying households with incomes above $200,000, the amount of charitable contributions that would be affected would grow to $5.4 billion, or 16.5% of all charitable contributions reported on 2009’s tax returns.

But that’s not the worse of it. There is a real human cost that would be borne by the President’s attempt to go after the wealthy by going after the tax deduction for charity.

Just consider what motivates these individuals’ giving (hint: it’s not getting a tax deduction – the tax deduction just allows them to do more than they could do otherwise!):

Frustrated with the sluggishness, or nonexistence, of medical research, Singh and a small band of wealthy parents whose children have serious illnesses are spending millions of dollars to fund drug development.

These benefactors include hedge-fund managers, private- equity investors and entrepreneurs, many of whom have made their fortunes on Wall Street. The principles they apply in their jobs — managing complicated tasks, making investments and expecting positive results — translate to their new endeavors, says Stacy Palmer, editor of the Chronicle of Philanthropy.

“Business executives have a better understanding of how markets work and have started to ask tougher questions,” Palmer says. Their goal: “Change the system and whatever is slowing it down.”

The new philanthropists are building on a foundation laid by well-known predecessors. John D. Rockefeller in 1901 formed the medical research institute that would become New York’s Rockefeller University after his grandson died of scarlet fever. Billionaire Michael Milken, who pioneered junk bonds, founded the Prostate Cancer Foundation and FasterCures, a think tank to speed progress toward cures in all medical fields.

Clearly, that kind of initiative comes too close to treading on the President’s turf because it fully exposes his own health care program’s shortcomings. After all, those foundations exist because the government either can’t or won’t adequately deal with the sickest Americans.

According to the CBO, roughly 25% of the charitable donations of the millionaires the President believes should be forced to pay more money to his U.S. government goes toward those kinds of health organizations.

Ultimately, the President’s jobs bill isn’t about getting the unemployed into jobs. It’s really about the raw exercise of power. It’s nothing less that the President’s attempt to put down the individuals who oppose the President’s worldview by keeping them from being able to use their own resources as they see fit to compete with it.

And that’s just too big a price to pay for “stimulus” jobs that just won’t last.

Data Source

Joint Committee on Taxation. JCS-3-10: Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014. Table 3 – Distribution by Income Class of Selected Individual Tax Expenditure Items, at 2009 Rates and 2009 Income Levels. 21 December 2010.

Congressional Budget Office. Options for Changing the Tax Treatment of Charitable Giving. May 2011.

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September 2011