President Obama's recently released budget has generated a lot of angst, even among the nonprofit community. One of the contentious parts of the president's proposal is a cap on charitable tax deductions by the wealthy. Many argue that the limit will reduce the amount of money wealthy people give, thereby shrinking the already shrunken coffers of many NGOs.
If this turns out to be true, could we safely assume that most people only give large sums to charity because they know they'll get it back?
In the Chronicle of Philanthropy, Robert Reich - one of my favorite economists - argues that in the long run, there are trade offs to be made: can a better funded (and reformed) healthcare system better take care of our nation's populace than the nonprofit sector, which relies on the generosity of the wealthy?
He also raises a great point, while I make regular (albeit small) donations to charitable orgs, I am not eligible for deductions because my gifts have never exceeded $5,000. Perhaps our president is simply making equity more of a priority? I'm waiting for Newt Gingrich and Rush Limbaugh to use their socialism cry as a relaunching pad.
Addition: Thanks to one of our readers who sent us this link to the March 2, story in the Wall Street Journal. Would Bill Gates be concerned about getting $700 less on his $10,000 donation?
Picture: U.S. Government Printing Office
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So this is a fascinating issue I've been thinking about a lot because I am torn.
On the one hand, we know that people generally respond to incentives. So if charitable giving becomes "more expensive" to people who itemize their deductions because it's capped at a 28% deduction rather than 35%, there is a certain segment of people who will give less. Some, because they now can only afford to give less. And some, let's be honest, will give less because of the tax issue--although to be fair,there are many other reasons besides altruism that people give (prestige, peer pressure, leaving a legacy).
On the other hand, the tax code is structured so that charitable giving disproportionately benefits higher-income folks because they are in higher tax brackets (and also probably more likely to itemize). Is this fair?
Of course, I think the more interesting story is how we have evolved into a system in which rather than providing certain socials services itself, the government chooses to incentivize giving to the nonprofit sector via the tax code.
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