Obama’s cut for charitable contributions


I was listening to the radio this morning and caught part of Obama’s latest press conference in which he states the desire to cut the maximum deduction for charitable giving from 39% to 28%. I do not wish to discuss whether I think this is a good idea, but there are a few statements he made that are misleading.
 

And what we’ve said is: Let’s go back to the rate that existed under Ronald Reagan. People are still going to be able to make charitable contributions. It just means, if you give $100 and you’re in this tax bracket, at a certain point, instead of being able to write off 36 percent or 39 percent, you’re writing off 28 percent.

Obama is suggesting the wealthiest continue to get taxed at 39% but can only write off 28% of their charitable contributions, meaning they will get taxed on their contributions to charity, although at a lower rate than the money they keep. What is misleading here is Obama suggesting he is just taking things back to the way they were under the Reagan tax plan. This is not true. Under Reagan, you could only write off 28%, as the maximum tax rate was 28%. Under Obama, the tax rate is 39% and you can only write off 28%. In real dollars:

Item            Reagan         Bush
Earnings      10,000,000    10,000,000    10,000,000
Tax               2,800,000      3,900,000     3,900,000
Charity          1,000,000      1,000,000     1,000,000
Write Off          280,000        390,000         280,000
Tax TTL        2,520,000      3,510,000      3,620,000

In that sense, what it would do is it would equalize. When I give $100, I’d get the same amount of deduction as when some, a bus driver who’s making $50,000 a year, or $40,000 a year, gives that same $100. Right now, he gets 28 percent, he gets to write off 28 percent. I get to write off 39 percent. I don’t think that’s fair.

The problem here is the math of equalities does not work out. Let me illustrate:

Joe Busdriver – paid $28 on the $100 he earned. Joe gave $100 to charity, so Joe got back $28. Net result: charity +$100, Joe $0
Rich Guy – paid $39 on the $100 he earned. Gave $100 to charity, so he got back $28. Net result: charity +$100, Rich Guy -$11

So, for every $100 given to charity, the rich guy pays an extra $11 in taxes. For every $1000 given to charity, the rich guy pays an extra $110 in taxes. For every $10,000 in taxes, the rich guy pays another $1100 in taxes. And so on. At the $1,000,000 level, it is another $110,000 in taxes.

Q: It’s not the well-to-do people. It’s the charities. Given what you’ve just said, are you confident the charities are wrong when they contend that this would discourage giving?

OBAMA: Yes, I am. I mean, if you look at the evidence, there’s very little evidence that this has a significant impact on charitable giving.

There is ample evidence that people who understand money take money into account when they make decisions. This is true whether it is poor old Joe bus driver or rich guy. If you have $20 to spend on dinner, you are not going to go to Ruth’s Chris. True, there are plenty of people who would just charge it and pay for it later (pun intended), but smart people budget their money. And, there are very few people that get rich by being money stupid. What this means is, if you have $10,000,000 to give to charity under the old tax rate, you only have $8,900,000 to give to charity under the Obama suggestion. This means charity suffers to the tune of 11%. Perhaps 11% is not considered significant? Otherwise the statement is pure male bovine fecal matter.

Unfortunately, until we really get some "leaders" in office who will really get rid of the pork (unlikely in our lifetimes), things have to get paid for with taxes. And, as long as we continue to work under the myth that it is the government’s job to baby sit us rather than govern, we will have a lot of extra pork to contend with. Someone has to pay for it. I get that. But don’t tell me it is fair to have someone pay $39 into the system and then hand him back $28 when he gives the money to the less fortunate. And don’t tell me it won’t hurt charity. And don’t tell me we are just going back to the way it was under Reagan. I am not that stupid.

Peace and Grace,
Greg

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