Monday, April 2, 2012

In Stunning Development This Forum Supports One Aspect of Reducing Taxes on the Wealthy - If They Want to Give There Money Away, Fine

Non Profits – Get Ready For Fallout from Abolishing the Estate Tax

A part of the tax code is that if you itemize deductions you get to deduct charitable contributions, but that deduction is limited.  Exactly why the deduction is limited is not clear.  Presumably it is so that a wealthy person cannot completely escape paying income tax, because if a wealthy person did give away all of their income in a year and there were no restrictions on the deduction for tax purposes, the person would have zero taxable income and zero tax.

Clearly the charitable deduction limitation is at odds with the purpose of the deduction in the first place.  If the rationale for allowing a deduction for a donation to a legitimate charity is to encourage and support charities, then limiting the deduction which reduces contributions conflicts with that goal.  That is the situation in Britain where the government is moving to reduce the deduction for charitable contributions.

At the moment philanthropists can make unlimited donations to charity and qualify for full tax relief on their gifts. From April 2013 the amount of relief they can claim will be capped at £50,000 a year or, if it is higher, at one quarter of the donor's income

As one might expect, charities are alarmed.

Mr Osborne has a serious rebellion on his hands from a charitable sector already buffeted by the winds of economic downturn and the Government's austerity drive. Forty-five per cent of its income comes from large donations from the super-rich – and charities now fear that an essential source of funds could begin to dry up.

Their worries are underlined today by a survey of philanthropists by the Charities Aid Foundation. It has found that 83 per cent feared the move would cut gifts to charity, with more than a quarter saying they could even scale back their own donations as a result.

So what about the United States.  Well here there are two proposals that could drastically affect charities.  Elimination of the Estate Tax would mean wealthy donors lose the tax incentive to leave parts or all of their estates to charities.  Now giving to charities by bequeathing assets at death would not end entirely, but it would be severely curtailed.  And lowering taxes on living wealthy people would mean that they too would have less of an incentive to give to charity.

For some reason charities are not upset over all this, particularly the abolition of the Estate Tax.  And yet they could be damaged to the extent of billions a year.  It may be that charities are afraid to lobby for continuation of an Estate Tax for fear of offending wealthy donors or it may be that they are just plain ignorant of the impact.

As far as policy for deductions for charitable contributions for income tax purposes, this Forum supports an unlimited deduction.  If a wealthy person does not pay tax on their income because they gave it all away, great.  All of us benefit, and the pressure on government to provide various services is reduced because the charitable entities often supplies services that would otherwise fall to government.