Rich Donors May Be Undeterred by Tax Caps on Charitable Gifts

Robert Greenstein, executive director of the Center on Budget and Policy Priorities, a Washington research group that usually sides with Democrats on economic policy, said the deduction cap merely reinstates limits former President Ronald Reagan signed into law in 1986. He cautioned, however, that tax rates were lower then, too.

Reagan Era
“One can look back to the period of the late ‘80s and find that whether it was home purchases, charitable contributions or the like they did not collapse when the incentive at the top of the income scale was 28 percent,” he said.

Obama, 47, proposed limiting the value of itemized tax deductions to 28 percent for the approximately 2.6 million U.S. households that fall into the top two income tax brackets, which would be 36 percent and 39.6 percent beginning in 2011 under his budget.

In 2008, the second-highest tax bracket kicked in at taxable income of $164,550 for single taxpayers and $200,300 for married couples. The top bracket last year was triggered at $357,700 for both groups; by 2011, both figures will be higher as they are adjusted for inflation annually.

Under Obama’s proposal, a taxpayer in the top bracket who donates $1,000 to charity would get a tax savings of $280 instead of $396 without the change. A taxpayer in the second- highest bracket would lose $80 in tax savings. The proposal would also limit tax savings for other write-offs including mortgage interest, state and local taxes paid, and medical expenses, among other itemized deductions.

One Percent Reduction
Jon Bakija, an economics professor at Williams College in Williamstown, Massachusetts, and Treasury Department economist Bradley Heim recently estimated that top earners reduce their donations by between 0.5 percent and 1 percent for every percentage-point increase in giving costs.

That means charitable giving may be reduced by between 10 percent and 20 percent under Obama’s proposal, Bakija said in an interview.