Wednesday, April 01, 2009

President Obama's War On Charity

First, LBJ had the "War on Poverty," then Reagan launched the "War on Drugs," now President Obama has come up with the "War on Charity"?

Yes, President Obama wants to tax charitable contributions for households making more than $250,000 a year. His hope is that the government will earn $11 billion in additional revenue from this plan

This is not shocking since President Obama believes that government is the answer to all societal ills, rather than contributions from private citizens and organizations. However, I have a lot more faith in churches and non-profits in providing social services, then the federal government who has run up a massive deficit and bankrupted social security with our tax dollars. But the president is just concerned with growing government and not improving the lives of less fortunate among us.
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It is clear that President Obama wants to continue his attack against the wealthy in America, by punishing them for their success, and therefore not allowing them to use their assets to help others.

Martin Feldstein in the Washington Post gives a perfect example why taxing the charitable contributions of the wealthy is bad idea:

The administration's plan would limit the amount that high-income individuals could deduct to 28 percent of their gifts, down from 35 percent, even though their incomes would still be taxed at a higher marginal rate. This raises the cost per dollar of giving from 65 cents to 72 cents, an increase of 10.8 percent that can be expected to reduce the total giving of these donors by about 10 percent.

What would this mean in practice? Suppose someone would give $10,000 to a university if that amount were deductible at 35 percent. That deduction would reduce the individual's tax bill by $3,500. Limiting the deduction to 28 percent would lower the individual's tax saving on a $10,000 gift to $2,800.

This is where things get interesting: If the 10 percent increase in the cost of giving caused the person to reduce his gift by 10 percent, to $9,000, his tax savings would be 28 percent of $9,000, or $2,520. The government's revenue loss would be reduced by $980 (from $3,500 to $2,520). The person's gift to the university would be reduced by $1,000, almost the same amount. Since this high-income person would pay $980 more in taxes but give away $1,000 less, he would end up with an extra $20 for personal consumption.

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