In a Time of High Deficits, the Charitable Deduction May Be Too Costly to Keep

To paraphrase Sara Lee, nobody doesn’t like the charitable tax deduction. It doesn’t have many enemies. It’s the tax-code equivalent of your slacker brother-in-law. It doesn’t really work, it seems harmless enough, but it costs plenty.

President Obama demonstrated that he understands the problem when in last week’s budget proposal he suggested limiting the size of charitable deductions that the very wealthy can take on their tax returns. Still, his action doesn’t go as far as it probably should, given the cost to the federal treasury of the charitable deduction.

Here’s an example of what’s at stake: A few years ago, T. Boone Pickens gave his alma mater, Oklahoma State University, $100-million to build a state-of-the-art football stadium, which now bears his name. Assuming Mr. Pickens pays the same 15-percent federal income-tax rate as Mitt Romney, thanks to the charitable tax deduction, he paid $85-million out of his own pocket, while taxpayers picked up the tab for the other $15-million. Of course, Mr. Pickens may claim that he pays more taxes than Mr. Romney—say, 20 percent—which would put the federal treasury on the hook for an additional $5-million. Go Cowboys!

Speaking of Mitt Romney, he tithes to his church, as Mormons are supposed to do. He recently revealed that his total earnings were about $21-million in 2010 and $3-million went to charities, with about half to his church. That gift probably cost the federal treasury several hundred thousand dollars. Here’s a question: If there were no charitable tax deduction, do you think Mitt Romney would have stiffed his church? Would Boone Pickens have informed the Oklahoma State Board of Regents that it would have to scale back its athletic dreams?

The fact is the federal charitable tax deduction doesn’t play a part in the faithful churchgoer’s decision to make gifts to a church (which account for more than one-third of charitable gifts), nor does it sway large donor decisions for naming-opportunity gifts to universities and museums. And, of course, for the 70 percent of all American taxpayers who don’t itemize their taxes, the charitable tax deduction is only a concept, because they don’t get any write-offs.

Add to this the fact that the most generous Americans as a percentage of income (around 2.6 percent, more than a third higher than the national average) are those who earn less than $25,000 a year, and it’s clear that the charitable tax deduction is not such a big incentive as some say.

After spending most of my adult life in the nonprofit world, I’ve seen first-hand the good that donors can do by making charitable donations. I believe in giving to charity. And because almost all my income is taxed at standard rates, I pay just about double what Mitt Romney does in taxes as a percentage of income.

So I enjoy the tax deduction that I receive for my gifts to charity. But does it factor into my decisions about how much to give to my favorite nonprofits? Of course not. If the government wants to slip me a few bucks at tax time to subsidize gifts to my alma mater or my church, I’ll take them. But I don’t need them. And that’s part of the conundrum of the charitable tax deduction: The people who could really use it don’t get it, and the wealthy people who get it don’t need it. So why do we spend $37-billion a year to give money back to rich people?

That’s hardly the position most nonprofit leaders take. Instead, every time President Obama has proposed trimming the deduction even slightly for the wealthiest Americans, religious and charity executives start screaming bloody murder, saying contributions will plunge if rates are reduced. Nonsense.

In the last 30 years, the top income tax bracket has been reduced from 70 percent to 50 percent to 38 percent to its current 35 percent, and Americans’ giving rate has remained rock solid—hovering between 1.75 percent and 1.9 percent of the average person’s income year after year. Even some researchers who are enamored of the charitable tax deduction admit that those decreases in the charitable deduction have had only a temporary effect, and maybe no impact at all.

President Obama’s advisers suggested at one point after the State of the Union speech that the White House was backing away from taking on the charitable tax deduction this year. But in recent weeks, it seems the president has listened to his own speeches and rethought that position. At the recent House Democrats’ annual retreat, President Obama said, “When you give me a tax break that I don’t need and the country can’t afford, two things happen: Either the deficit increases or, alternatively, somebody else has to pay the tab—that senior, that student, or that family who’s struggling to make ends meet.”

Over the next decade, the charitable tax deduction will cost the American taxpayer $250-billion. It’s a tax break the rich don’t need and the country can’t afford.