I’ve seen a couple of posts by claiming that the fiscal cliff deal will reduce charitable giving by reducing the incentive to give. The math on those claims doesn’t add up.1 Here’s what the deal actually did.
If you2 make over $250,000, the total amount of itemized deductions you can claim is reduced by certain amount. In other words, if your previous itemized deductions were x, your itemized deductions are now x - (Your Adjusted Gross Income - 250,000)*.06.
So let’s break out how charitable deductions fair in this. We know that x = State Tax + Other Deductions + Charitable Deductions. Because State Tax and Other Deductions are likely to be fixed, the tax benefits to charitable deductions are only going to get pinched if State Tax and Other Deductions are less than 6% of your income less the $250,000. In most states, income tax alone is going to be more than 6% of the income. If you own any real estate, property taxes will cover the rest on that. In other words, you’d need to have astonishingly few low deductions for there to be any decreased incentive at all for charitable giving. And even then the disincentive is only to the first smidgeon of giving.
In other words, the chance that this change will affect any individual taxpayer’s economic incentives for philanthropy are lighting-strike low.
Somebody is likely to point out that a tax incentive shouldn’t be necessary to get people to make charitable contributions. I get that. For most people it isn’t. But a lot of nonprofits rely on megadonations from a relatively small set of highly-sophisticated uberphilanthropists. The deduction allows a donation of $1,000,000 to have a post-tax effect of $600,000 or less, depending on how it is structured. A hard cap on deductions would probably lead to a pretty dramatic decrease in giving. ↩
To be technical, the maximum cap is 80% of the itemized deductions—but this 80% bit isn’t going to be relevant unless the remaining 20% of the itemized deductions exceed the the standard deduction of $5,950. So you would need to fall into some narrow sliver of people who have incomes above $750,000, and itemized deductions above about $30,000 but below 6% of your AGI - $250,000. ↩
I wrote and deleted about five acerbic responses to this and am just going to leave it here instead.
“Why has the government been instituted at all? Because the passions of men will not conform to the dictates of reason and justice without constraint.”
In other words: zoos need keepers.
I cling stubbornly to a belief in the human potential for goodness and nobility, but I recognize that sometimes the ball just stays poised at the top of the slope, you know what I mean?