Obama Budget’s Impact on Charitable Giving Will Be Minor

Barack Obama has a plan to limit itemized deductions for people in the very top of the income tax brackets. This will only effect a very small number of people and the primary impact would be to reduce the extent of the tax break that very rich people get for living in very large houses. But there’s no denying that it would also reduce the extent of the tax break that very rich people get for giving money to charities. Naturally, the very rich and their political allies prefer to emphasize the charity angle over the big house angle. But as this Center on Budget and Policy Priorities analysis makes clear the impact on charitable giving would be small. Their basic math goes like this:

Itemized deductions as a fraction of total charitable giving (0.622)

x
Fraction of itemized charitable contributions affected by proposal (0.182)
x
Increase in after-tax price of giving for those affected by proposal* (0.113)
x
Elasticity of giving with respect to a change in its price** (-1.00)
=
Reduction in total charitable giving (-0.013)

So you’d be talking about a slightly larger than one percent decline in charitable giving. Against this, they observe that the budget contains two major provisions that should be favorable for charity groups. One is affordable health care for all Americans. CPBB observes that “Health reform will greatly reduce the burden on non-profit organizations to provide free health care, thereby offsetting to a significant extent the overall drop in contributions.” The other is the restoration of the estate tax. Rich people dying has always been an important source of big-dollar charitable giving, and the taxation of very large estates has added an extra incentive to dedicated more funds to legacy-building charitable contributions rather to one’s progeny. So what the Obama tax plan taketh away with one hand, it giveth back with the other.