Charitable Deduction Faces a Fresh Challenge as Lawmakers Attempt to Close Deficit

Republicans on the Congressional deficit-reduction “super committee” are reportedly proposing to limit tax deductions for charitable gifts and other expenses, an idea that draws from a plan by three experts at the National Bureau of Economic Research.

Democrats have rejected the Republican offer, so it may not gain any steam. But the latest proposal shows that the idea of tinkering with the charitable deduction as a way to raise more revenue is not going away.

Daniel Feenberg, who helped draft the experts’ plan, says that if it were adopted as is, “I don’t think there’s any denying it might have some adverse effect on giving.”

The proposal offers a different approach than the one outlined by President Obama, who wants to limit the tax write-offs that wealthy people can get for charitable gifts and other itemized deductions to 28 percent.

Instead of singling out any individual deduction, it would limit the total amount of tax savings that taxpayers could get for charitable giving and other expenses: They could lower their taxes by no more than 2 percent of their adjusted gross income.

“With the 2-percent cap, individuals would continue to benefit from all of their current deductions, exclusions, and credits,” Martin Feldstein, a professor of economics at Harvard University, one of the authors of the plan, wrote in a New York Times opinion piece. “It is the total tax benefit and not any particular tax reduction that is limited.”

Republicans have reportedly suggested combining a limit along those lines with a reduction in income-tax rates, a plan that would have a different impact than the one described by Mr. Feldstein. But the paper that he and the two other experts wrote describing their plan says it would raise $278-billion and simplify tax payments by encouraging 35 million people, or three out of four taxpayers who now itemize their deductions, to shift to taking standard deductions.

However, it would also reduce the incentive for charitable giving because once taxpayers reach the 2-percent cap, they would get no further tax break for their gifts. Furthermore, taxpayers who shift to the standard deduction would have less of an incentive to increase donations.

“People who are affected would have a higher price of giving, so they would be inclined to give somewhat less,” says Mr. Feenberg, a researcher at the National Bureau of Economic Research.

“To some extent, the alternative is to end up like Greece,” he adds, emphasizing he was speaking only for himself and not his co-authors. “That’s not good for philanthropy, either.”