Hands off charitable deductions

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And that is why, as someone who has been fortunate enough to be able to contribute significantly over the years, I am extremely troubled to see that capping the deduction is one of the “compromises” on the fiscal cliff trading table. It’s not that I object to people like me paying our fair share. There is room for compromise on the higher tax brackets. There is a 4.6 percent gap between the Bush top tax rate of 35 percent and the proposed increase to 39.6 percent; we could just split the difference and raise the rate by around 2 percent. In addition, let’s close abusive loopholes immediately. We can surely afford that, and I think it’s right, if that’s what it takes to keep our economy and country sound. But hands off charitable deductions. It works, don’t fix it. Capping the tax deduction for charitable contributions will have a devastating effect, directly and indirectly. So, it’s not surprising that representatives of non-profit organizations are descending on Capitol Hill to fight to keep the deduction alive.

According to studies by Independent Sector, non-profits and foundations employ nearly 13 million people and account for 5.5 percent of our GDP. They have more than 62 million volunteers providing more than 8 billion hours of service – the equivalent of another 4 million jobs, worth more than $170 billion. Non-profits spend roughly $1.9 trillion annually, including investments in every state in the union.

The top two per cent of taxpayers donate more than $100 billion a year to support those institutions. They do it because it’s the right thing to do, and the deduction provides a strong incentive. If the charitable deduction is capped, that certainly will change. There is likely to be a noticeable attitude adjustment when people feel that the government isn’t encouraging charitable giving. People like me might find ourselves feeling just a bit more selfish.  We might buy a bigger house, a yacht, more racehorses, and even a new plane.  We may think to ourslves, “Well, I don’t really need that new Ferrari, but I only have one life to live.” In fact Independent Sector reports that without the deduction, annual giving is expected to drop by as much as 36 percent; and estimates are that a cap would cost charities as much as $7 billion a year. Without the incentive of a deduction, bet on it, people will give less.

This could mean that museums won’t expand; new hospital wings won’t be built; new research centers won’t be created; new professors, teachers and physicians won’t be hired. And for every building that isn’t built, every expansion that is put on hold, every research project that is abandoned, you have a corresponding loss of momentum, and a ripple effect in the economy. You’d lose untold thousands of jobs, in the institutions themselves and in all the ancillary businesses that support them. The construction workers who won’t be putting up the new building; the carpet-layers who won’t be putting in the new carpet; the food services workers who won’t be providing additional meals; the computer companies that won’t be setting up new systems. In short, capping or eliminating the deduction would be a serious impediment to economic growth.

Clearly, we need to get real about fixing the terrible economic quagmire we’re in. A big part of the solution has to be large reciprocal spending cuts to be added to the sandwich; Economics 101 tells us we can’t tax ourselves out of this mess. But, as I said, I have no objection to asking the rich to help by paying more.

My prescription would include a 2 percent tax increase for top bracket earners; our top rates are the lowest in the developed world, so there’s room for some adjustment. Eliminate the bonus depreciation allowance on anything that may be considered toys for the rich, which lets you deduct 50-100 percent of the value of some major luxury items in the first year. Get rid of the founders and carried interest loophole, currently taxed at 15 percent as capital gains. Cap mortgage and medical deductions for the highest brackets. 

We can all chip in. But hands off charitable giving.

Mack is chairman emeritus of the New York State Council on the Arts.