Do the Wrong Thing: Obama's War on Giving

by Benjamin Domenech on 5:15 pm March 26, 2009

Why does Barack Obama seem so committed to using tax policy to discourage people from doing the right thing with their money?

It’s not just the AIG bonus provisions which penalize those who donated or gave back their bonuses. It’s the President’s continued refusal to acknowledge the very real ramifications of the tax policies he supports on American philanthropy, offering no help to important charities at the financial breaking point.

Mike Allen of the Politico posed the question to President Obama in his prime time press conference the other night (not to be confused with his online presser today), a question prompted in part by the major pushback from some Democrat Senators and a wide-ranging portion of American charities: “Are you reconsidering your plan to cut the interest rate deduction for mortgages and for charities? And do you regret having proposed that in the first place?”

After discussing the Bush tax cuts’ expiration, Obama answered in part:

OBAMA: People are still going to be able to make charitable contributions. It just means, if you give $100 and you’re in this tax bracket, at a certain point, instead of being able write off 36 or 39 percent, you’re writing off 28 percent. Now, if it’s really a charitable contribution, I’m assuming that that shouldn’t be a determining factor as to whether you’re given that $100 to the homeless shelter down the street.

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’d 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 $100. 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.

So I think this was a good idea. I think it is a realistic way for us to raise some revenue from people who benefited enormously over the last several years. It’s not going to cripple them; they’ll still be well-to-do. And ultimately, if we’re going to tackle the serious problems that we’ve got, then in some cases those who are more fortunate are going to have to pay a little bit more.

Q: But it’s not the well-to-do people, it’s the charities. Given what you just said, are you confident the charities are wrong when they contend that this would discourage giving?

OBAMA: Yes, I am. I mean, if you look at the evidence, there’s very little evidence that this has a significant impact on charitable giving.

Charities aren’t buying the President’s answer, and with good reason. As I cited before in my piece outlining the war on philanthropy, the evidence on this argument is mixed at best, and at worst, it can be very bad for charities that operate on long-term educational or health issues. As Alex Brill and Phillip Swagel outline in The American, looking forward shows that President Obama’s tax proposal would reduce charitable donations by $125 billion over the next decade:

The tax hit on charitable donations is sizeable—a 20 percent increase in the cost of giving to charity for high income taxpayers. According to projections from the nonpartisan Tax Policy Center, $50 billion in charitable donations will be made by taxpayers that would be affected by the Obama proposal if it was enacted. Recent economic research finds that among higher-income taxpayers, a 1 percent increase in the after-tax cost of a charitable donation reduces contributions by about 1 percent. This means that the Obama proposal would reduce charitable donations by roughly $10 billion in 2011 and by $125 billion over ten years. To put that in context, $10 billion is the combined annual private support to The United Way, Salvation Army, American Cancer Society, Food for the Poor, YMCA of the USA, and Feed the Children.

And looking backward at the numbers, the Center on Philanthropy at Indiana University outlines the President’s disagreement with the facts:

The Center looked at how giving would have been affected in 2006 (the latest year for which itemized deduction data are available) if the Administration’s proposals for charitable gift deduction rates and personal income tax rates for taxpayers with income above $250,000 had been in effect at that time. The Center estimates that the two changes combined would have resulted in a reduction of total itemized giving by the highest income households of 4.8 percent in 2006, or a drop of $3.87 billion in itemized contributions by those households. Total itemized giving by households in the highest income categories in 2006 was $81.26 billion.

Now it’s possible of course that accepting the modest prediction of a drop of roughly 5% of American giving, a little under $4 billion, or even accepting the more expansive $125 billion over ten years figure, just is not viewed by President Obama as a “significant impact.” He does, after all, deal in billions and trillions when it comes to bailouts and budgets. But imagine for a moment where these cuts happen. It’s not as if everyone on the giving side of the class structure gives in the same pattern, just with a 5% haircut: instead, they give less, and they give to fewer organizations. Those charities that do some of the most important long-term work are often those that suffer as people reprioritize based on the immediacy of need. And those needs are only growing:

Sixty-two percent of charities have less than three months’ worth of cash on hand to cover costs, and just 16 percent expect to be able to pay for their expenses this year and next.

Many of those nonprofit organizations “were not necessarily robust going into this,” said Clara Miller, president of the Nonprofit Finance Fund, which conducted the study. “And now they’re virtually all seeing a future increase in demand for their services while they have a tightening cash cushion.”

Sen. Chuck Schumer and other Democrats who apparently understand this matter a bit better than the President are aghast at the idea of raising taxes on charitable giving at a time of economic turmoil. That’s one of the reasons he and several fellow Democrats introduced a bill this week to ease the tax burden on foundation giving, which could come to function as an olive branch to the philanthropy community.

It still boggles my mind, however, that the President believes the government should take a greater chunk from money – money which, if it is not donated, need not be subject to this tax – intended to help others. Shouldn’t he be all about encouraging wealthy Americans to give their money to worthy causes? Why does he want the tax man to rob the train before it arrives?

Perhaps he just has a very different view of the purpose of American generosity. Consider another controversial issue at the moment: the National Committee for Responsive Philanthropy’s report demanding all charities assign half their grants to racial minorities and the poor.

The report, released this month by the National Committee for Responsive Philanthropy, argued that foundations should meet a handful of benchmarks to practice “philanthropy at its best,” including making half their annual grants to “lower-income communities, communities of color and other marginalized groups, broadly defined.”

Several foundation leaders have called that benchmark overly prescriptive and argued it could exclude philanthropies that pursue missions such as the arts, medical research and education — areas that might not always directly affect the groups identified by the committee.

Requiring member organizations to do this would doubtless receive support from some corners — but it would also drastically hurt organizations who are focused on issues completely unrelated to the inner city and don’t have any attitude toward minorities. Writing at the Huffington Post, influential foundation president Paul Brest was blunt about it: “Even for someone who shares NCRP’s concerns about marginalized communities, its hierarchy of ends is breathtakingly arrogant.”

Is cancer an issue where racial political quotas should come into play? Are museums? What about heart disease, or higher education, or saving the whales or the rainforests? The Philanthropy Roundtable created an organization, the Alliance for Charitable Reform, to respond. The head of one well-known international non-profit had this response:

Many of the responses to the NCRP recommendations begin by paying lip service to diversity. Diversity, in and of itself, is neither good nor bad. We should have space in our philanthropic vision for non-diverse charities, perhaps those exclusively focused on issues affecting minority communities or particularly countries of the world. How about a supporting organization for the Harlem Boys Choir? The NCRP view of the world begins with the perspective that one-size fits all and we must be brow-beaten or even coerced into following a formula given to us from above. I prefer the Tocquevillian vision of philanthropy that begins in the communities of America and works its way up spontaneously, without being forced into a stultifying prescription handed down by elites who think they know better than the rest of us folks.

Perhaps, at heart, that’s what President Obama’s tax policy on charitable giving is all about. Less money being given by individual Americans to support causes they believe are important, more money for the government being given to support causes and organizations that President Obama and his administration believe are important. It’s easy for him to say that there will be no “significant impact” on giving or society because of this, but perhaps that’s just because his ideology is based on the idea that whatever the problem, government can address it better. It’s an ideology that fosters an America that doesn’t focus on empowering leaders within free communities, but on creating a nation of many followers, trailing behind the leadership of the tenured bureaucrats of Washington, their generosity mandated by the government.

At its worst, President Obama’s answer the other night suggests that he thinks this issue is about wealthy Americans complaining about higher taxes, instead of being willing to consider that it’s actually about how giving by the wealthy affects everyone else. He argues that marginal changes won’t affect giving because they shouldn’t, not because he has the evidence to support this statement. As we’ve seen repeatedly in recent years, in the context of tax, crime, and welfare policies, people do respond to marginal changes in incentives, especially economic incentives (to work or not work, to invest or not invest) whether or not we wish it should be so.

Perhaps the President was just being glib to a reporter with a nagging followup question. But if the President’s answer was indeed honest, and an indication that he actually believes this is how the world works, it is a sign that we have elected a man to the White House who — for all his eloquence before the masses — has a distinct lack of understanding of the balance of government and human nature. And this is a profoundly disappointing thought.

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