TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, September 4, 2013

Tolan: Obama's Proposal to Limit Tax Deductions for High-Income Donors Would Undermine Charitable Giving

Patrick E. Tolan, Jr. (Barry), Compromising the Safety Net: How Limiting Tax Deductions for High-Income Donors Could Undermine Charitable Organizations, 46 Suffolk U.L. Rev. 329 (2013):

With the election behind us, tax reform looms as the hot-button topic of the day. Based on election results, it is likely that the Obama administration will continue to push for the same types of reforms proposed in the 2013 budget. However, inadvertent consequences of the administration’s proposals, specifically those impacting charitable donations, may lead to unfortunate results in the rush to do something to break the gridlock on tax reform, especially while federal spending remains reduced or “sequestered” until the budget can be balanced.

President Obama’s budget proposals have contemplated reducing the top rate for charitable deductions (and all itemized deductions) to 28%. Because America’s largest donors are those in the highest marginal tax brackets, efforts to limit deductibility of charitable donations could have a chilling effect on charitable giving.

In this Article, the author looks at motivations for charitable donations and specifically at the impact of tax deductibility as a motivating factor. He takes a historical look at philanthropic surveys and econometric models and examines empirical data concerning impacts of significant changes to the tax code in the 1980s that could be used as indicators of what effect the proposed limitations on deductibility could have on donations. The author also considers impacts of the recent recession on the nonprofit sector, which has already been burdened by historically high numbers of unemployed individuals and children in poverty.

Because the economic downturn has already stifled charitable giving at a time when the nonprofit sector faces high demands, any further erosion may be the straw that breaks the camel’s back. If tax changes dampen enthusiasm for charitable giving even further, struggling charities may go under, and prospective new charities may not be able to get off the ground to pick up the slack. At the end of the day, government welfare programs, which are more costly than a tax subsidy for charitable donations, would be needed to meet the needs of citizens slipping through a crumbling safety net.

Scholarship, Tax | Permalink


It's not an accident that Obama's tax policy would hit charities hard. Charities are the competition. The less charities are able to do, the more call there is for ever larger government solutions. Moreover, charity is antithetical to the entitlement ethos. People are grateful for receiving charity; they feel entitled to receive food stamps, welfare, etc.

Posted by: Marc Collins | Sep 5, 2013 5:18:03 AM

Perhaps the tax effect is not so important for everybody, but I just made a sizable gift to my old high school's scholarship fund, rationalizing the donation as one made with 55 cent dollars. But you know with the phaseout of deductions and all the other new stuff in the ObamaCare statute, I can't really be sure I'll get a tax benefit. I'd be better motivated if the law was more clear and straightforward.

Posted by: SongDog | Sep 5, 2013 5:57:11 AM

I think for Obama this is a feature and not a bug. He would prefer people be more dependent on the government and less helped by private charities.

Posted by: MarkInFLorida | Sep 5, 2013 6:34:59 AM

Why does Tolan assume that eliminating charities is inadvertent? I assume it's a feature for those who want to grow government. When you eliminate charities you increase the demand for government services. It has the bonus feature of weakening the Republican argument that private charities can take care of things currently handled by government.

Posted by: Mike | Sep 5, 2013 6:42:11 AM

And with charitable donations down, there is a better excuse to ramp up Governement giving... at least to the "right people". So basically this will have the effect of increasing government.

Posted by: Ed | Sep 5, 2013 6:50:35 AM

I have stopped charitable giving outside my church. Obama can provide for the rest.

Posted by: Joe Mack | Sep 5, 2013 9:47:40 PM