Obama's New Tax Proposal: Who Does it Really Help?

The recent economic crisis has caused individuals to reevaluate how to spend their money, and reassess what organizations, if any, they can continue to support. President Obama has presented the idea of a tax adjustment that essentially transforms public donations into private government reserves for healthcare. Should such legislation be approved charitable organizations will face even larger drops in donations and correspondingly worsen the already feeble structure of charitable institutions. While President Obama's plan to itemize tax deductions for charitable giving is intended to help gradually save money and expand healthcare to American's in need of coverage, his proposal is an immediate threat to charities because it increases the price of donating and makes it even more difficult for donors to give in a time when charities need the most assistance.

The President's 2010 budget blueprint is designed to reduce tax-deductions among individual donors making more than $200,000 and married couples earning $250,000 or more annually from the current rate of 35% down to approximately 28%. To best illustrate Obama's proposal consider the following example: suppose a high-income individual donates $10,000 to a charity with a 35% deductible rate. The deduction would decrease her or her taxable income by $3,500. Now imagine that the deductible rate is lowered 7%, meaning that a donor pays 7% more in taxes, the individual now will only save $2,800 from his or her charitable gift. While no one makes a charitable contribution solely for the tax deduction, the fact remains the deductibility of donations reduce the cost of giving and thereby enable individuals to give more generously. Thus Obama's proposed tax transformation is comparable to a sin tax acting as a disincentive and deterrent for individuals to give to charitable foundations.

In a recent press conference when asked about the matter, President Obama (pictured right at a conference in the White House on March 24) stated that such a tax change is "fair" because it only effects the top 5% of household and it creates an equal deduct for all income brackets. In fact, those individuals in higher income tax brackets are paying up to 15% more in taxes (39% marginal tax rate at the highest level) than those in lower tax brackets. Furthermore, some will argue that higher income household will give more dollars per capita that those at lower income brackets. If the Obama administration wants to make sure that low-income donors enjoy the same tax benefits for their giving as high-income donors enjoy the same tax benefits for their giving as high-income donors they should raise the deduct amount for charities contributions to the higher rates is they truly believe that non-profits are providing valuable services to society.Ultimately, under the new tax codes both the people and the charities that are taxed. Those who gives at high rates will have less control over how their earning is spend. Essentially, the government is determining how people should spend their money.

While Obama feels that if people are giving for altruistic reasons that the tax deductibility rate should not affect donations, he is naïve to think that some people would not welcome an added tax bonus for charitable giving to offset their income. Sadly, regardless of people's reasons for giving, in tough economic times like today charities will be handicapped with 7% reduction in revenue and with incomes falling the effects would be compounded and crippling for some charities. Support of the tax change, such as the Tax Policy Center, argue that the net impact to giving will only be 1.3%, assuming this figure equates to $7 billion dollars a year. Although the President says the change will affect a mere percentage of fundraising, the amount is still substantial and significant and will cause individuals at higher income rates to reduce their charitable contributions to maintain their current standard of living. The full impact of the tax change will go into effect in 2011 giving some time for the economy to recover. The $7 billion dollars per year charity tax is part of the Obama administration's goals create a $634 billion dollar health care reserve fund over ten years to reform and support the current Medicare system and move the country a step towards universal healthcare (the model to the left illustrates Obama's healthcare saving system.) Half of the money for the fund will come through health care spending efficiencies by the government and the other half will come from tax increases on charitable giving and mortgage deductions among higher income households.

By issuing this proposal, the Obama administration is creating a rift between the government and the non-profit world. While now is the time that charities and the government should be partnering to provide social services, this movement is causing anger and negativity to brew in the non-profit world. The impending tax change has caused a stir in the news this past week, causing news reporters and economic analysts to question the destruction potential of such a severe change. The tax increase is being referred to as a "sin tax" by Robert Sharpe, a consultant on charitable giving and Forbes columnist Daniel Indiviglio says Obama is "short-changing charities." Both Republicans and Democrats alike feel that the tax proposal defies logic and will make an already bad situation for charities that are already suffering from of the desperate state of the economy worse.

This issue ultimately questions what the size and scope of the government should be in the matters of an individual's spending. If the movement becomes a law the government will essentially generate a surplus of $7 billion a year towards Obama's "health care piggy bank." By reducing tax deductibles less money funds the organization of a person's choice, and more money goes straight into the governments hands- an event that the Wallstreet Journal affectionately has dubbed " For the Rich, Government Is the New Charity." While government intervention may oftentimes be helpful in other social or political causes, when it come to issues in philanthropy it is common knowledge that the organization itself it more efficient in allocating resources and actively engaging with those in need more then the government. However if Obama's proposal passes the funding priorities will shift from the private sector to the public sector and ultimately encourage fewer donations to charity in favor of higher taxes to support government programs. Thus private citizens will have less control over where their money goes and how it is spent thereby enabling government bureaucrats to take American's tax dollars and decide to spend other citizens hard earned money however they see fit. This sends a powerful and presumptuous message-the government knows best and will decide what is best for every American- which is a dangerous message to fundraisers that are in dire need for privatized giving to survive through these difficult times.