Proposed tax structure and the real impact
Posted by Jacob Johnson on March 29, 2009 under Economics, Politics | 
2 Comments to Read
One area that appears to be overlooked in the area of Obama’s tax plan (to be implemented in 2011) is the area of individual behavior and amount donated as it relates to the amount of tax incentive. The government intends to change (lessen) the amount one is able to deduct from donating to charity from 35% to 28%.
An example of this is if I donated $100 to an entity that was a tax deductible entity as determined by the IRS, I would pay $35 less on my taxes. The proposed change would result in only receiving the benefit of a $28 reduction on my taxes, a $7 dollar “reallocation” from me, to the government. Which appears to be a smart move (on first look) by the government to raise income. However, this article suggests for every 10% increase in tax deductability, it “raises the amount that a person gives by about 10%.”
A visual representation of the change in tax structure is seen below. The real impact is felt by the charity, who deals with a 20% reduction in income, while the government sees a 6% increase in tax revenue, and the individual sees a 7% increase in discretionary spending. It was probably not the intent to re-allocate dollars from charities to the government , but without considering the relationship between tax deductions and amount donated, this is exactly what capital hill has proposed.
Jmartens said,
What I think is interesting is that the proposed change is only for high income individuals and couples. On first glance, one might think it’s appropriate to lower the tax benefit for wealthy folks. However, I suspect that a disproportionate amount of money given to charity is given my small number of wealthy donors. So not only will this tax plan reduce the benefit of giving to charity, it will have that effect only on the people that are most responsible for keeping charities going. Kind of a double whammy.
Mjohnson said,
Jmartens is right, this proposed change is for families making over $250,000. In 2006 families earning more than $250K, which represents less than 2% of all taxpayers, were responsible for 28& of all giving. More than $81 billion dollars in charitable gifts. According to a study by The Center on Philanthropy, based on the 2006 data, the proposal would result in 4.8% reduction in itemized giving…about 3.9 billion. However, many people believe, including the President, most households who are donors are not going to become non-donors because of this change in policy. we’ll see
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