CNN chose to close the report (on some shows) with the remark (paraphrasing), "A study by the Bank of America indicates that only 7% of the affluent based their giving decisions on the tax advantages." That is not what I read. The Chronicle of Philanthropy News Update of March 3, 2009 summarizes from the Bank of America survey that, "... 47% of people in the survey reported that they would give less" based on a removal of the deduction (the survey posed an all or nothing question, not a % reduction). Furthermore, the head of the Center on Philanthropy which conducted the study with the Bank of America, concluded that:
"Tax incentives do stimulate more giving, and challenges facing the nonprofit sector in 2009 suggest that this might be a good time to provide additional [emphasis added] incentives, rather than reduce the value of the tax deduction for high income households, so that donors with the greatest capacity to give have more reasons to do so."
Since then, the Obama administration has also put out a follow-up from the Office of Management and Budget. Their response to the criticism from me and others (including The Independent Sector, The Partnership for Philanthropy and The Council on Foundations) was threefold. I present their arguments below and my reaction to them:
1. OMB argument: The proposed tax changes would not be imposed during a recession ... Instead it would begin in 2011 - at which point we expect the economy to be recovering.
Reaction: There is no guarantee that the economy will be better and to what degree it will be "recovering". This is all hypothetical. The one thing that is certain is that the Obama administration intends to impose a reduction in the deduction regardless.
2. OMB argument: The money raised from the limits on itemized deductions would be used as part of the historic $634 billion reserve fund to fund health care reform.
Reaction: This tax change is taking from donations to all categories of charities to give to an array of health care charities and others. It is penalizing the generosity of the affluent. Many charities, both large and small, garner 80% or more of their private contributions from a handful of affluent donors. If these donors reduce their donations, it could have horrific consequences for these charities.
Furthermore, government funding is often the worst type of funding a charity can receive. I know from years of running government funded programs that many of these contracts pay no more than 10% for overhead costs. Charity Navigator considers the best charities to have an overhead rate of 25% (15% for administration and 10% for fundraising) or less. Most 4 star charities are in the 20 to 25% range. So when a charity gets a government contract, it typically is "shooting itself in the foot", financially speaking. The charity will usually have to raise the additional 10 to 15% of its overhead costs from the public. A public where the affluent (80% of the donation pool for many charities) will now be less inclined to give as much. In addition, most government contracts have onerous, time-consuming reporting requirements which further increase overhead costs beyond the normal.
3. OMB argument: There is a question of fairness...If you're a teacher making $50,000 a year and decide to donate $1,000...; you enjoy a tax break of $150. If you are Warren Buffet... you get a $350 deduction...
Reaction: Fairness! The OMB neglects to mention that the overall tax rate for the more affluent households is going to increase from 35% to 39.6% and they are also proposing to eliminate other deductions for this group of tax payers (mortgage interest, as well as state and local taxes). At the same time, that $50,000 teacher (assuming two children) will on average have their overall tax rate go to zero! So let's be fair in our comparisons!
On top of all of the increased taxation mentioned above, most of us have seen a decline in our investments of 50% or so. We are in uncharted waters here. Whereas historically, half of affluent givers may have said that tax deductions do not impact their giving decisions, that does not mean it will continue to be so. As one of our users commented on the Charity Navigator blog,
"Although I don't give to charity for the tax benefits, I may have to give less because I can't afford to give as much if my obligation to the government is increased. It's that simple. I do [emphasis added] think this proposed change could have a direct, negative effect on charities, and I hope it gets re-evaluated."
Of course we agree with those who say that often the primary and very best reason for giving is out of benevolence, but incentives and self interest have also been important factors. That is the basis of our capitalist system isn't it? The charities I spoke with in Russia and China are desperate for, and envious of, our tax policies. The reason our rate of donation is the envy of the rest of the world (more than double anywhere else) in part rests on the heart and soul of the American people, but it also rests on pragmatic government policies that lead to enlightened self interest. I hope the Obama administration will wake up and smell the coffee. As I originally stated on CNN, the proposed reduction in the Charitable Tax Deduction is a horrible idea.