When he gave his jobs speech, President Obama left the hard job of paying for the $450 billion stimulus to a Congressional super-committee. Yesterday the White House released a set of suggestions for where the money could come from. The bulk of it would come from limiting line item deductions for the "rich". This would raise $400 billion. It would also eliminate the long-standing tax deduction for donations to charity.
Currently any money that you give to a recognized charity can be deducted from your taxes. This is meant to encourage charitable giving. It keeps you from having to pay taxes on money that you gave away.
Obama's proposal will raise the cost of charitable giving by at least a third. The marginal tax rates for the people affected by this proposal are 33% and 35%. Under current tax law, if you contribute $100 to charity then it is deducted from your gross income and you do not have to pay taxes on it. Under the new plan, it would still be taxed so that contribution would cost you at least $133 of pre-tax income.
This can lead to strange results. If three ghosts visited a wealthy man and induced him to donate his entire income for the year to charity to make up for past slights, he would still owe taxes on that income.
Actually, all of the line item deductions either recognize money that is gone and should not be taxes or are meant to encourage specific behavior. Eliminating them will have profound and unpredictable consequences.
Certainly charitable donations would drop. The easy way to adapt to the new tax law would be to figure in taxes and donate the taxed amount. This might mean donating the $65 dollars left after the government taxes $100. Some people might quit giving completely out of disgust. The point is that charitable giving is voluntary. If the government raises the cost of giving then people can economize by reducing their donations.
This is the second time that Obama has proposed eliminating charitable deductions from the tax code. Since this will hurt charities much more than the rich one has to wonder why he is doing this? Especially since most charities are already stretched because of the Great Recession. Fewer people are donating and the demand for services has increased. This is the wrong time to discourage charitable donations. The people most affected will be the poor, not the rich.
Why is Obama doing this? Does his desire to tax the "rich" blind him to the likely results of this policy? Or is he actually trying to hurt charities? Many Democrats distrust charities since some of them are related to religious organizations. It is possible that they see the charities as infringing on areas better server by the government. If that is the case then a tax policy that hurts charities is easily understood.
Regardless of other considerations, this makes Obama's jobs bill nothing more than a transfer of income. It will take money from the "rich" and redistribute it mainly to democratic constituents - government workers and unionized industries. That make it even less likely to do any real good.