Charitable Tax Deductions

11/4/12

Now that my mid-term exams are over for this fall semester (whew!), I have been doing a little extra-curricular reading and researching for the fund, and came across a great article from The Chronicle of Philanthropy last week detailed an on-going debate about tax deductions for charitable contributions.

Nonprofit Leaders Urge Obama and Romney to Protect Tax Break

The growing federal deficit has sparked conversation/debate/argument about how to change ("reform") the tax code.  Both candidates have, at one point or another, made it clear that they will support changes that adversely affect charitable donations.

President Obama has said that while he does not support eliminating the charitable tax deduction, he does support putting a cap on the amount that tax payers can write off - lowing the current cap of 35% to 28%, for high-income earners.   

According to the article, Congress has never supported such a low cap on charitable deductions, but with the size of the national debt quickly becoming an even hotter topic, donors may soon find themselves without the same incentives to give as they had before.

Governor Romney, on the other hand, has made it clear that he supports a (virtually) flat tax across the board.  He plans on implementing a revenue-neutral reorganization of our income tax levels, which (if you do the math*) means that all deductions, include the mortgage interest deduction and the charitable tax deduction.  Depending on where we fall on the Laffer Curve** it is possible that a lower overall tax rate will result in an increase in total revenue for the government, thereby allowing Washington to start paying down the debt.  This would certainly be a good thing for the U.S. balance sheet, but citizens are left without a tax incentive to contribute their money to charities! 

It is important to retain this charitable deduction, so as to incentivize donors to contribute their money to help those who need it.  Although there are debates about which organizations are/should be covered by the charitable deduction, it is irrefutable that without a tax incentive (or with less of a tax incentive), charities will not be able to operate as effectively or as thoroughly.

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*Governor Romney's proposed lower tax rates will cut revenue by almost 1.2 trillion per year, and in order to have a revenue neutral result, he would have to simultaneously eliminate all of the available tax deductions and write-offs, which total to about 1.1 trillion per year.

**The Laffer Curve suggests that there are some situations in which a tax-rate increase would yield more total revenue.... but only to a point.  After this critical tax rate, marginally higher tax rates cause people to stop working as hard or to stop working at all (because they get to take home less of their hard-earned money), therefore decreasing the total tax revenue collected, despite the higher rate.  The kicker is that it is impossible to know in which situation we live, for even if we conduct a conscious experiment, there are too many factors in revenue generation to attribute the results to the change in tax rates.