Obama, Charity, and Fairness

Leave it to Barack Obama to justify a tax proposal that would significantly reduce the amounts going to charity -- on grounds the proposal is necessary for "fairness."  In his press conference on March 24, the president offered this explanation of his proposal:

And so this provision would affect about 1 percent of the American people. They would still get deductions. It's just that they wouldn't be able to write off 39 percent. In that sense, what it would do is it would equalize. When I give $100, I get the same amount of deduction as when some -- a bus driver who's making $50,000 a year or $40,000 a year gives that same hundred dollars. Right now, he gets 28 percent -- he gets to write off 28 percent, I get to write off 39 percent. I don't think that's fair.

Obama's example is a useful analytical tool, but the conclusions properly drawn from it are virtually the opposite of his.  To understand why, however, you need to know some basic facts about the tax system - which Obama misrepresents in his example.

According to the latest IRS statistics, the top 1 percent of American taxpayers in 2006 bore 40 percent of the burden of the income tax (the top 50% paid 97 percent, and the bottom 50 percent bore 3 percent).  Under the Obama tax proposal, the top rate is increased by 13 percent (from 35 to 39.6 percent), and the relative burden borne by the top 1 percent will presumably increase even more. 

It is not clear at what point that burden will finally reach Obamian "fairness" (and the president has much more "fairness" in mind for the top 1 percent once he turns to social security taxes).  But it is manifestly not necessary to increase the top tax rate (much less restrict deductions) to administer "fairness" to the top 1 percent; they already bear an extremely high proportion of the tax burden.  The 40 percent burden is the highest it has been in 30 years (including all of the Clinton years) -- and more than double the 19 percent figure in 1980.

Moreover, Obama's comparison with the $40,000 bus driver -- let's call him Joe the Bus Driver -- is seriously misleading.  If Joe is married with two children, he will receive a standard deduction of $10,900 and personal exemptions of $14,000, resulting in taxable income of $15,100 and tax of about $1,172 (after a $341 earned income credit).  His effective tax rate is less than 3 percent -- even if he makes no charitable contributions at all. 

In other words, Joe the Bus Driver does not suffer from his inability to deduct charitable contributions at 39 percent -- he is already the beneficiary of a tax system that reduces his effective tax rate to a minimal percentage even if he has no deductions whatsoever.

The same 2006 IRS statistics show that 43 million American taxpayers paid no tax at all, and many of them received -- in addition -- a payment from the government, because the earned income credit is "refundable" (meaning it can exceed the taxpayer's actual tax liability, resulting in a "refund" even if no taxes are due).  That is still another indication that "fairness" is not a pressing problem in the American tax system.  Viewed in terms of the proportion of the tax borne by the rich, the system is "fairer" than it has ever been.

The Obama proposal to combine a tax rate increase with a deduction limitation is thus not necessary to create "fairness" in a tax system that is already extremely progressive.  On the other hand, the proposal is necessary if the goal is not fairness but rather to transfer to government money that would otherwise go to charity. 

The mechanics of that transfer are explained in detail in "Obama's Double Tax Whammy," but a shortened explanation will suffice to illustrate the point:  if top tax rates increase by 13 percent, one can expect contributions to charity to increase by at least 13 percent -- both because wealthy taxpayers could then donate 13 percent more to charity at the same after-tax cost, and because such taxpayers will increasingly decide to benefit charities of their choice rather than pay more taxes to the government -- and thus may well increase their contributions by more than 13 percent, in reaction to the new higher rates. 

Without Obama's deduction limitation, more money would thus go directly to hospitals, schools, churches and other charities.  Americans would have increased incentives to provide funds directly to worthy institutions already working in the community and perennially in need of additional funds, and the result would be significantly more direct aid for United Way, the American Cancer Society, colleges and other schools, churches and synagogues - the entire array of charitable, educational, and religious activity in the United States.

By limiting the deduction to 28 percent, however, the Obama proposal will not only take away the incentive for increased contributions, but do the opposite:  make the current level of contributions substantially more expensive on an after-tax basis -- and thus inevitably reduce them.  Charitable contributions will not only not increase, but actually go down.  Estimates of the money that would go to government rather than to charity run as high as $4 billion per year.

Not only does this effect not faze Obama -- it is the intended result.  And the reason is not "fairness."  As Randy Shaw, the editor of BeyondChron (San Francisco's Alternative Online Daily), wrote earlier this week, there is a much different goal:

Even if we accept that charitable giving would decline by nearly $4 billion under Obama's plan, this critique addresses the wrong issue. The key question is whether the United States is better off having wealthy taxpayers pay more toward funding universal health care, or rather are free to give more billions to Harvard and Yale, more billions to elite art museums, and to otherwise spend tax dollars in a way that does not address a pressing public priority.

And there you have it:  the problem is that taxpayers can benefit charities of their choice, rather than send the money to Washington to "address a pressing public priority" the government deems more important.  Shaw concluded that opponents of Obama's plan "miss the big picture" -- which is that "Government, not private donors, should decide how tax dollars are allocated."  Implicit in this view is the conclusion that charitable contributions are actually the government's money -- and the government wants part of it back.  So income would be taxed at 39.6 percent but the contribution would be deductible at 28 percent -- meaning the government would effectively get a 11.6 percent toll charge on any charitable contributions made by the top 1% of taxpayers.

It is not really fairness to Joe the Bus Driver that Obama has in mind; nor is he trying to add "fairness" to a system that is already more than fair.  The government needs as much money as it can get to fund its new expanded goals, and Obama has found a way to get a large chunk of it from charities -- while justifying the massive transfer of funds to government as something required for "fairness" to bus drivers.  George Orwell, call your office.

Hat tip:  Thomas Lifson

Gregory V. Helvering is the pseudonym of a tax lawyer with more than 30 years experience working with the tax system.  His prior articles in American Thinker are "Spreading the Wealth and Killing the Goose" and "The Obama Double Tax Whammy."
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