Obama Tax Proposals: Danger Ahead for Charities and Civil Society

Here’s a test: Guess who made most of the charitable contributions in 2006, according to the most recent data available from the Internal Revenue Service? If you guessed “taxpayers with high incomes”, you’d win the prize. Now, guess which class of taxpayers the Obama administration wants to discourage from making charitable contributions. If you guessed “taxpayers with high incomes”, you just won again.

The new Obama budget for Fiscal Year 2010 proposes that Congress reduce the tax deduction for charitable contributions by high income taxpayers. That worries many charities who depend on contributions from the well heeled and affluent among us. If the tax incentive to make a deduction is taken away, that might lead some to reduce their giving to charities.

It also should worry those concerned about the future of the civil society, or that collection of institutions, organizations, and non-governmental processes that handle most of life’s challenges in our neighborhoods and social networks. Fewer dollars from upper income neighbors mean less activity by organizations those dollars support.

So, how big a problem could this be? According to the IRS, the 3,656,493 tax returns containing incomes above $200,000 contributed $81,261,387,000 to charities. That’s an average contribution of $22,224. Now 3.6 million returns is only 9 percent of all returns in 2006, but $81.3 billion in contributions is 44 percent of all giving as recorded through the tax forms. The number probably is a good deal higher than that, since many taxpayers do not report all or any charitable contributions on their itemized deductions schedule.

So, it’s a big problem. By the way, the rest of us (37,781,256 tax returns) probably won’t fill the gap. Taxpayers with incomes below $200,000 and who itemized their deductions contributed $105.4 billion to charities, for an average contribution of $2,789, or nearly ten times less than those taxpayers above $200,000.

Of course, millions of taxpayers of more modest means do not itemize and still give to charities and churches. We know from research on charitable giving that an average of about 2 percent of income is given in good years and in bad. Indeed, this percentage has weathered recessions and stock market bubbles with amazing equanimity.

So, why worry? Well, that’s a percentage of income, not a dollar amount. When recessions hit, incomes fall; and so does the total amount going to charities. Suppose that everyone’s income falls by 50 percent, yet they still give 2 percent to charities. That’s a lot fewer dollars going to help homeless people with shelter and food, to provide domestic violence victims with counseling and protections, and to supply little leagues teams with uniforms and practice time.

What we really need in bad times is for high income individuals to step up to the plate. Yet, President Obama essentially is saying, don’t worry: we can still win with our biggest bats sitting on the bench. Given the central role that these dollars for charity play in the very real game of life, that’s an awesome and dangerous gamble for the president to make.