Friday, March 13, 2009

Charitable Giving

One place that President Obama wants to raise taxes is by reducing the credits from itemized deductions. White House Press Secretary Robert Gibbs put it this way:
"Well, I do think all issues are on the table," Gibbs replied. "Let's, though, just discuss the — I assume you're talking about the charitable contribution — I mean, a middle-class family donates a dollar to charity, they get 15 cents off their income tax. Bill Gates donates a dollar to charity, he takes 35 cents off his income tax. The proposal that the White House has would simply reduce those levels to the same levels that we saw during the Reagan administration."
Taking the last first, taxes were pretty high when Reagan took office and he couldn't cut everything immediately. That line is just a red herring, anyway.

Let's look at the math behind this statement. The tax rate on the middle-class family is 15%. It rises to a top rate of 35%. That means that after deducting the income tax, the average family gets to keep $0.85 of every dollar earned but Bill Gates only gets to keep $0.65. Bill makes a lot of dollars (except last year when he lost $18 billion) so that $0.65 adds up.

Currently, both the average family and Bill Gates can give a dollar to charity and deduct it from their taxable income. This policy rewards charitable giving by recognizing that you no longer have that dollar to be taxed. The Obama administration wants to change this so that when Bill Gates gives a dollar, he would still ahve to pay taxes on it, although they would be reduced - maybe $0.26 in taxes instead of $0.35. The effect of this is to make charitable giving more epensive. It will cost Bill $1.26 to give a dollar to charity ($1 to charity and $0.26 to the government).

Remember that charitable giving is voluntary. If the government raises the cost of giving then people will just give less. Bill Gates might reduce his contribution to $0.75 so that the total cost to him would continue to be $1. The charities have figured this out and are up in arms.

The real estate industry is similarly outraged for the same reason. Obama plans to reduce mortgage deductions the same way. This will not make any difference to Bill Gates but people inbetween Gates and Obama's magic $200,000 income ($250,000 for families) will notice if their mortgage costs go up by 25%. The ones who were already stretched paying for their mcmansions may default and we will have another wave of bad credit. Even if the default rate is low this will push up the cost of buying houses the same way that a big jump in interest rates would do. This will hurt the top-end real estate market which is why the realitors are up in arms.

Realistically neither of these measures is likely to pass. That means that revenues will be below Obama's projections and the deficit will be even higher than he projected.

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