Obama’s Jobs Bill and charitable tax deductions

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It was widely reported in the US equivalent of our own voluntary sector press this week that President Obama’s new Jobs Bill would have potentially serious implications for charitable giving in the States. According to reports, it is proposed that the $447 billion bill would be mainly financed by limiting the percentage of income wealthy donors can write off against their income tax, including deductions for charitable donations.

The current system in the US allows all taxpayers who fill in an itemized tax return to offset any gifts to charity (including the value of goods given to charity stores) against their income tax liability for the year. At the moment, the limit for deductions (including charitable ones) is set at 50 per cent of income, and donors get relief at their highest marginal rate of tax. The new bill proposes reducing the value of the relief for higher rate taxpayers (paying 35%) from 35% to 28% from 2013 (thus effectively ensuring a minimum tax payment). This would affect individuals with an adjusted gross income (AGI) of at least $200K or married couples with an AGI of at least $250K. Anyone earning less than this will not be affected.

Many nonprofit leaders and those in the large US philanthropy industry have reacted angrily to the proposals, claiming that they will lead to a significant decrease in charitable contributions. At face value this seems like an obvious truism: reduce the incentive to give, and people will give less. However, there are two reasons to be a bit more hesitant about jumping to this conclusion.

Firstly, there is evidence (which I have referenced in previous blog posts) that charitable giving behaviour does not respond that directly to changes in personal tax reliefs. While there may be some longer-term negative effects of reducing personal deductions, it is not as simple as just assuming that a reduction in tax relief implies a concomitant reduction in giving.

Secondly, there is the fact that this change will only affect a small number of donors, so the overall impact may not be that great. The majority of people who give to charity in the US are not itemizing taxpayers so they aren’t even eligible for deductions (Rob Reich of Stanford University point out this inherent unfairness in the US model here), and of those who do itemize, many will not have a high enough income to be affected by the new rules. Obviously this doesn’t take into account the likely statistical bias toward higher earners being more generous donors, but it is still an important consideration.

The interesting thing about this debate for those of us in the UK is that is throws into sharp focus the issue of the government’s role in supporting charitable giving. I have explored the issue of how charitable tax breaks can be justified at some length in a previous blog post. The conclusion I reached was that the only viable justification for tax incentives is that they provide a way for the government to support the general health of civil society. If this is case, then it is possible that the new measure is justifiable if it can be argued that it will result in a better situation for civil society. Proponents of the Obama jobs bill argue precisely this: that the change is in fact in the charity sector’s best interests because the longer-term benefits of getting the US out of recession will outweigh the disadvantages of a potential reduction in charitable giving.

Whether you believe this depends largely on your views on the effectiveness of public as opposed to philanthropic spending. Unfortunately, this is not an issue on which people tend to have particularly balanced views. My suspicion is that many of those who support charitable tax breaks do not do so because they take an objective view about them being the most effective way for the government to support civil society, but rather because they believe that philanthropic giving is inherently preferable to public spending. Hence they are unlikely to accept any argument that suggesting reducing tax reliefs in order to bolster government revenues.

It will be interesting to see how this debate plays out, particularly as the US is held by many to be an exemplar of the sort of philanthropic culture the UK should aspire to. If the changes do in fact result in a downturn in US giving, it could mark an important shift in the rhetoric on philanthropy here in the UK.

Rhodri Davies

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