On the eve of last week's presidential debate, Republican Mitt Romney floated a trial balloon to deflect public attention from his detail-free tax plan certain to give a massive windfall for the wealthy, burden middle class taxpayers and balloon the national debt. But largely overlooked in his murky and still-to-be defined proposal to put a dollar cap on individual tax deductions is the devastating impact it would have on charitable giving. Combined with his demand to end the estate tax, Romney's plan would choke off donations to America's non-profits, churches and charities.
When President Obama in 2009 proposed raising $318 billion over the next decade by trimming wealthier taxpayers' deductions for charitable giving from 35to 28 percent, Republicans were apoplectic. Then House Minority Leader John Boehner darkly warned the reform would "deliver a sharp blow to charities at a time when they are hurting during the economic downturn." But as Bloomberg and The Chronicle of Philanthropy each explained at the time, Obama's proposal would likely have little to no impact on charitable giving. An analysis by the Center on Budget and Policy put the impact at only 1.9 percent of total donations. Noting that the same upper income 28 percent deduction was in place during Ronald Reagan's first term, then-OMB chief Peter Orszag rightly concluded that "what drives charitable contributions is overall economic growth."
But Governor Romney's proposed cap on individual deductions is another matter altogether. As he explained his new plan conveniently unveiled on the eve of last week's first presidential debate:
"As an option you could say everybody's going to get up to a $17,000 deduction; and you could use your charitable deduction, your home mortgage deduction, or others - your healthcare deduction. And you can fill that bucket, if you will, that $17,000 bucket that way. And higher income people might have a lower number."
Within 24 hours, Romney changed his plan yet again. Once-again side-stepping the question of which tax credits, deductions and loopholes he would end, Romney pulled a new figure out of the air during Wednesday's debate:
"Make up a number, $25,000, $50,000. Anybody can have deductions up to that amount. And then that number disappears for high-income people."
If so, a large source of funding for America's hospitals, museums, institutions of higher education and more might disappear as well.
Currently, only about 30 percent of filers itemize their deductions, which in 2009 averaged over $26,000. But as Ezra Klein explained last week, "80 percent of tax savings from itemization goes to the top 20 percent of Americans households, and 25 percent of the savings goes to the 1 percent." In 2011, the Congressional Budget Office said those making over $500,000 a year gave 3.4 percent of their income to charity. (Individual contributions accounted for $227 billion of the $304 billion raised by charities in 2009.) Romney's proposed cap would have its greatest impact on upper-income, blue state residents, whose larger state and local tax bills and home mortgage interest payments currently provide the biggest sources of deductions. But charitable giving by the wealthiest Americans, like Mitt Romney's own $2.25 million deduction in 2011, could be slashed as well.
Jim Andreoni, a UC San Diego professor of economics who studies the economics of charitable giving, explained why:
"The effect on charitable giving is likely to be large for high income individuals, especially in the short run..."Some deductions are difficult to change, like mortgage interest or property taxes," says Andreoni. "Those will stay fixed for now, and for many high earners will more than use up the $17,000 cap on deductions. By contrast, charitable giving is about the only category of deduction that people can use in the short run to adjust for an increase in taxes. ... [E]ven though both your mortgage and your charitable giving are losing some tax benefits, only your giving can change in the short run to make up part of that loss.
So, high income donors will have two reasons to cut back on giving. First, they are losing after-tax income from deductions on things other than giving and that are hard to adjust, like mortgage interest. Second, giving itself will become far more expensive and is far easier to change than other deductions. It's intuitive to me that charitable giving will take a big hit from the cap on deductions."
(Given his annual 10 percent tithe mandated by his church, Mitt Romney would likely be an exception to the rule. Still, that doesn't make his claim that his charitable contributions make his own paltry tax rate "really closer to 45 or 50 percent" any more true.)
But capping the dollar value of annual deductions isn't the only way Mitt Romney's tax plan would gut charitable giving. As it turns out, Romney's proposal to end the estate tax, a move which would save his heirs $80 million and those of his billionaire backers billions more, would dramatically slow the cash flow to America's non-profits.