Sophistry Passing as Scholarship

The Center on Budget and Policy Priorities wrote a "research" piece on the Administration's proposal to cap charitable deductions at the 28% bracket. The Center is a left wing "think" tank/advocacy organization formed in 1981. A good part of their original motivation was to oppose the proposals of the Reagan administration.

The president's proposal is likely to generate a lot of opposition. Since the income tax was first authorized there has been a charitable deduction in the code. It is unique among tax provisions in that it is the only provision which provides no personal benefit to the person claiming it, besides the slight reduction in tax liability. Once you make a charitable deduction you lose control of the assets you donate. But the Center makes at least three specious arguments in favor of the proposal.

The Administration’s proposal would cap the subsidy at 28 cents on the dollar for those with incomes over $250,000 —
the same rate at which those expenses could be deducted during the Reagan years, when the top tax rates were lower. As a result, the incentive to incur those expenses would be the same as under President Reagan.

This is a silly argument. Tax rates were lower in the Reagan era but the code was also less complicated. The mere complication of figuring different deductions at different rates will provide a disincentive to give to charities.

The proposal would affect only the 1.2 percent of tax filing units that are in the top two income tax brackets. Tax Policy Center data indicate that these taxpayers account for only 18 percent of the charitable contributions that are reported as itemized deductions. Thus, only about 11 percent of total charitable giving would be affected. A recent paper on the elasticity of giving suggests that a 1% change in net price of giving (i.e. raising or lowering rates) would change giving by $9 billion. That certainly is not pocket change.

The numbers here are phony. They are calculated on the number of donations not the amounts. While there will be some mitigation from the President's proposal to not change the estate tax provisions, ultimately the taxpayers most likely to be affected are also the donors who give the most. While there is not a direct correlation between the incentives offered in the tax code and the amount of giving (as once argued by economists like Charles Clotfelter) increasing the net cost of giving for the highest income taxpayers is more likely to reduce the total amount of giving.

The Obama Administration’s health reform proposal aims to provide health coverage to most or all of the 45 million Americans who are now uninsured. Currently, people without health insurance receive some free care from hospital emergency rooms, neighborhood health clinics, and other charitable organizations. Health reform will greatly reduce the burden on non-profit organizations to provide free health care, thereby offsetting to a significant extent the overall drop in contributions.

Only a small percentage of the total number of charitable organizations in the country are health charities and even a smaller percentage are hospitals. It is unclear whether the Obama proposals will reduce costs. But the proposals on the charitable contributions will likely reduce donations for ALL charities.

The Center did itself no favors by rushing out this baloney.