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.