2008 started out as a record year for our businesses but came to an abrupt halt in the last quarter. Seeing a very dim near term in the new few quarters we reassessed our cash needs and quickly made necessary changes, including layoffs.
Like many businesses we had accrued funds to give to charities, but we realized that we may need those funds for the business in the uncertain climate we foresaw. Should we pay the taxes on the income we had accrued but not spent, or go ahead and just give the money to charity anyway?
One of us (I won’t say who) quickly posed the problem; “we can either give $10,000 to charity or $4,000 to the government (in taxes).”
The purpose of retelling this story is to illustrate that taxes do affect charitable giving. That is the way the world is.
It may be nice to imagine an altruistic world where giving is 100% from the heart and pedestrian concerns such as taxes are irrelevant. Perhaps if we had never allowed a deduction for charity we would be at that place, but I doubt it.
In my dream world I envision the same tax system supported by Ed Koch; no mortgage deduction, no charitable deduction and a simple low straight percentage tax on income. But both Ed and I realize that our dream tax will never be enacted in a country where both parties see the tax code as a social engineering game, much as Mortimer and Randolph Duke’s little game in “Trading Places”.
President Obama believes that reducing the tax deduction for charitable contribution will have little or no effect on charitable giving. He sees the world as it ought to be rather than the world as it is. Such thinking makes for great philosophy but bad politics. We must deal with the world as it is.
Obama’s example and rationale was that a high tax bracket rich person should not get a bigger DOLLAR deduction than a poorer contributor with a lower tax bracket on the same dollar contribution. This is the elevation of class warfare to a level that will impede charitable contributions. It is hard to comprehend the cavalier attitude the leader of the country can use to defend and explain such nonsense. Some perverted sense of social justice is more important than charitable contributions.
Charitable organizations have lost fortunes in endowments in this bear market, and individuals’ losses have made giving much harder. In this environment the President chooses to discourage charitable giving?
I would propose precisely the opposite. I would offer to double the deduction from the applied tax rate: if you are at the 30% tax rate you could deduct charitable gifts at a rate of 60%. This would encourage more giving at a time that charities need it the most.
Few of us would argue that this would strongly encourage more charitable giving. If we concur that this tax incentive encourages more giving then we must disagree with Obama’s claim that tax incentives do not matter when giving to charity. If a higher deduction encourages more giving then a lower deduction would discourage giving.
That is the way the world is. It is the result that matters, not the intention.