M A NAGING
Ideas to Alter Tax Code Raise Questions About Charity Break’s Fairness
(although it prefers spending cuts to tax
But it also reflects a debate over just
how fair the tax break is.
One of the deficit-reduction plans—
issued by a committee of the Bipartisan
Policy Center, a think tank set up by
four former Senate majority leaders—
called the way the deduction is structured “perverse”: Because the percentage that taxpayers can write off for
their donations is the same as their tax
rate, wealthy taxpayers in the highest brackets get the biggest subsidy for
their giving. Furthermore, only taxpayers who itemize can get the tax break,
which means that people who don’t own
homes or have other reasons to claim
deductions, don’t get any tax benefit at
all. The committee—headed by Pete V.
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A third would limit the percentage
of itemized deductions that taxpayers
could take if Congressional committees
and the Treasury Department have not
adopted a plan to overhaul and simplify
the tax system by the end of 2012.
Some fund-raising experts criticized
the plans, saying the proposal to return
tax credits to charities would be far too
cumbersome and those to end or drastically curtail the deduction would discourage certain kinds of giving.
“I work with donors all the time on
complex philanthropic gifts in which
typically the income-tax deduction is a
motivating factor,” says Jill Dodd, a lawyer in San Francisco who advises both
donors and charities. She said cutting
the tax incentive could, for example, diminish gifts to community foundations,
Jewish federations, and universities.
How Two Plans to Overhaul Federal Spending
and Taxes Would Affect Charities
President Obama’s Commission on Reducing the National Debt
Ideas under consideration
Option one: Eliminate all $1.1-trillion in
federal tax breaks, including charitable deductions. Set aside $80-billion to cut the deficit.
Create three individual income-tax rates, from
8 percent to 23 percent, instead of the current six rates from 10 percent to 35 percent.
Pay for any tax break that is added back in by
increasing the tax rates.
Option two: Increase the standard deduction
for married couples to $30,000 (up from the
current $11,400). Allow deductions for charitable gifts only for amounts above 2 percent
of adjusted gross income.
What they mean
Pros for charities: Lower tax rates would give
potential donors more money that they could
spend on charity. Taxpayers, charities, and IRS
would have less paperwork.
Cons for charities: End to deduction would
remove incentive for charitable giving.
“I work with donors all
the time on complex gifts
in which the income-tax
deduction is a motivating
Domenici, the former Republican Senate Budget Committee Chairman; and
Alice Rivlin, the former Democratic director of the Office of Management and
Budget—suggested ending the deduction completely and replacing it with
a 15-percent credit that would apply
to all donations, regardless of whether a donor owed any taxes. In a system
modeled after Britain’s “Gift Aid” system, the credit would be claimed by the
charity rather than the taxpayer.
The organization would get 15 percent of two figures added together: the
donation it received plus the money the
donor would have received if he or she
had gotten a 15-percent tax credit. So if
a donor sent $85, the charity would get
an additional $15.
All of the proposals seek to make the
tax code far simpler than it is today.
Rob Reich, an associate professor of political science at Stanford
University—and a vocal critic of the
current charitable-deduction system—
urges the nonprofit world not to react
“like an interest group” defending its
entitlements in responding to the new
Instead, he says, “it should behave as
the diverse constituency it is to cham-
pion different ideas, to be the staging
ground or convening ground for a ro-
Mr. Reich argues that the tax code
should treat donors the same regardless
of income and offer bigger tax breaks for
gifts to nonprofits that serve the poor.
Independent Sector, the coalition of
charities and foundations, plans to put
together a special group by early spring
to examine the deficit-reduction plans,
says Diana Aviv, the organization’s
president. “The only way this kind of
thing will move forward is if every in-
dustry that is affected by these pro-
posals instead of saying no, no matter
what, looks at this against the larger
backdrop—and we think the charitable
sector should do that.”
While many of her organization’s
members oppose changes to the chari-
table deduction, the new group will also
include members with a different per-
spective, she says.
Tim Delaney, president of the National Council of Nonprofits, which represents small and medium-size charities,
says all Americans, including those
working at nonprofits, should avoid
“knee-jerk” reactions to the proposals.
However, he says, they should con-
sider how changes to the tax code could
affect people in need. “We shouldn’t be
asking whether nonprofits will be hurt
by some of these proposals,” he says,
“but whether the people we as nonprof-
its serve would benefit or suffer.”
Once President Obama’s deficit com-
mission issues its final report, endors-
ing or rejecting the proposals from its
Option three: Ask Senate Finance Committee and House Ways and Means Committee
to overhaul the federal tax code by the end of
2012 (creating a simpler system with lower
rates, fewer tax breaks, and better enforcement of tax laws). If that does not happen,
taxpayers could take only about 85 percent of
the value of their itemized deductions, including for charitable gifts, in 2015. That percentage would fall over time until the tax overhaul
Pros for charities: Higher standard deduction
would give taxpayers more money that they
could spend on charity. More taxpayers would
take the standard deduction, meaning less
paperwork for them and the IRS.
Cons for charities: Only wealthier taxpayers
would find the charitable deduction more attractive than the standard deduction, meaning
lower-income taxpayers would lose an incentive for charitable giving.
Pros for charities: Because the cut to the
charitable deduction would be gradual, the impact on giving could be less drastic than other
Cons for charities: The IRS would have a big
job teaching taxpayers how to calculate their
deductions, especially if the percentage they
can claim keeps falling.
Note: This describes a draft report offered by
the commission’s co-chairmen.
Bipartisan Policy Center
The other plan, offered by the co-chairmen of President Obama’s
commission—Erskine Bowles, the former Democratic chief of staff to President Clinton; and Alan Simpson,
the former Republican senator from
Wyoming—proposes three options that
would be phased in starting in the 2012
One would almost triple the standard deduction for married couples to
$30,000, while taxpayers who itemize
could get charitable deductions only after they had donated 2 percent of their
adjusted gross income.
Another calls for an end to all tax
breaks in exchange for slashing tax
rates to a range of 8 percent to 23 percent (compared with 10 percent to 35
percent today). If Congress wanted to
add back any of the breaks, it would
have to pay for them by raising the tax
Ideas proposed in November
n Eliminate both the standard deduction and
itemized deductions; end most other tax
breaks. Would save more than $3-trillion
between 2012 and 2020.
n Create just two income-tax rates, 15 percent and 27 percent, and a national sales
n Charitable donations (and mortgage interest
for a principal residence of up to $25,000)
would be eligible for a 15-percent tax credit,
whether or not the taxpayer owes any income tax. The charity would get 15 percent
of two figures added together: the donation
it received plus the money the donor would
have received if he or she had gotten a 15-
percent tax credit. So if a donor sent $85,
the charity would get an additional $15.
What they mean
Pros for charities: All donations would be
treated equally, unlike the current system in
which only taxpayers who itemize get deductions and people in higher tax brackets get
a bigger subsidy. Charities favored by low-income donors who now do not itemize—for
example, social-services organizations and
churches—could benefit most. Charities could
advertise the IRS’s extra donation as a way to
Cons for charities: End to deduction would
remove an incentive for charitable giving. This
could especially harm groups like universities
and cultural institutions that rely on higher-in-come donors, whose giving is most influenced
by tax incentives. Charities could face administrative burden of proving donations came
from federal taxpayers. Decisions made by the
federal government about how to distribute
the tax credits could be influenced by political
co-chairmen, all eyes will be on Congress.
Republicans, who have won control of
the House in the Congress that starts
work in January, were highly critical of
Mr. Obama’s effort to curb tax breaks
for wealthy donors, an idea that he re-
vived in his 2011 budget proposal after
proposing it a year earlier to finance
health-care legislation. But Mr. Colin-
vaux wonders if they will take a differ-
ent approach now that they are sharing