Eric Cantor, Tax Increases, and Soup Kitchens

By :: September 30th, 2011

PolitiFact’s Lou Jacobson recently pointed me to a blog post by House Majority Leader Eric Cantor complaining that President Obama’s proposal to limit itemized deductions would hurt soup kitchens—and their poor clients—by inducing rich people to give less to charities. That may be true, but Cantor’s own ideas about cutting taxes would do the same thing.

The federal income tax deduction for charitable contributions encourages taxpayers to donate to charities by reducing the after-tax cost of giving. If you’re in the 35- percent top tax bracket, for example, giving a dollar costs you only 65 cents because the deduction saves you 35 cents in taxes. The higher your tax rate, the lower your after-tax cost of giving.

Cantor complained about the president’s proposal to limit the value of the deduction for charitable deductions (and other deductions and some exclusions) to 28 percent. That would raise the cost of giving a dollar to 72 cents because the proposal would cut the tax savings to 28 cents. The higher price of giving would likely induce people to give less (at least in total—we don’t know whether they’d cut their donations to soup kitchens).

But that logic extends to other proposals to change tax rates. By Cantor’s own logic, tax policies that he supports could also harm soup kitchens by reducing donations. Cutting the top tax rate to 25 percent, for example, would raise the cost of giving to 75 cents per dollar, leading high-income donors to give less. (That reduction would be partly offset by what economists call the “income effect”—lower taxes raise after-tax incomes, so people give more because they have more to give. But the “price effect” from raising the cost typically outweighs the income effect.)

Another example: Allowing the 2001-03 tax cuts to expire for high-income taxpayers, which the president has repeatedly proposed and which Cantor opposes, could help charities. Boosting the top tax rate to 39.6 percent would lower the cost of giving and increase contributions. (Again, an income effect would offset at least some of the gain—higher taxes reduce after-tax income so people give less.)

In any case, it’s not soup kitchens that should worry about lower donations from the rich. More than 60 percent of donations in 2005 for basic needs came from people with income under $200,000, according to a 2007 study by the Center on Philanthropy at Indiana University. In contrast, more than 80 percent of contributions to health organizations and more than 90 percent of those for education and the arts were from people making more than $200,000. Those groups have a lot more to fear from reduced tax savings for donations.

Maybe it’s silly to complain that cutting tax rates would hurt charities by leading people to give less. But Cantor’s complaint that the president’s plan would go after soup kitchens in perilous economic times is equally silly. Both arguments are true, but both ignore larger points.

But then what would you expect here in Washington where silly political arguments are always in season?

10Comments

  1. Vivian Darkbloom  ::  8:52 am on September 30th, 2011:

    Both arguments are somewhat specious, but of the two, I’ll pick Cantor’s as the less silly. If tax rates are reduced and the value of a charitable deduction equals one’s marginal rate, the income pool from which charitable contributions can be made is bigger. Let’s take two simple examples:

    First, let’s assume the taxpayer has gross income of $1,000, the tax rate is 35% and value of the charitable deduction is capped at 28 percent. Before the charitable deduction is taken into account, the taxpayer has (net of tax) $650 to give. If he gives $100, his net income after tax and contribution is $678, the charity gets $100 and the government gets $322.

    Second, lets assume tax rates are lowed to 28 percent and the deduction is not capped. Here, taxpayer has $720 after nominal tax to give (rather than $650). After a $100 contribution, taxpayer’s net of tax and contribution is $748, the charity gets $100 and the government gets $252.

    Whether this increases or decreases charitable giving depends on whether the incentive is based on one’s disposible income or based on the amount of tax benefit to be derived. It’s probably a combination, but my sense is that the amount of disposible income is the bigger driver overall.

    Nonetheless, I would favor eliminating the deduction for charitable contributions (and most other “itemized deductions) completely and across the board. I would also eliminate tax exempt status completely. This should allow a reduction in tax rates across the board so that people have more disposible income to make contributions truly based on charitable motives. For example, if rates were reduced to 20 percent, the person profiled above would have $800 after-tax to make his charitable contributions. This would mean, among many other things, that Ivy League and other big endowment funds would pay tax on their earnings. The NYT reported yesterday that the Yale endowment fund at fiscal year-end was valued at $19.4 billion and that their annual return was 21.9 percent. Is there any good reason there should be a double tax benefit for contributions to these funds *plus* an exemption for these earnings? Clearly they don’t support soup kitchens. To add insult to insult to injury, a good portion of these tax-exempt benefits are “shared” with private equity partners that trade part of the management fees to these exempt funds in return for lower-taxed capital gains. This should not hurt soup kitchens too much—their expenses pretty much equal the contributions they get and, unlike our elite endowment funds, the objects of their generosity truly are needy.

  2. Michael Bindner  ::  9:07 am on September 30th, 2011:

    Of course, if you increased tax rates on dividends and capital gains, or allowed them to go up, the benefit from making productivity improvements to realize such gains would fall from 85 cents to 60.4 cents/70 cents at the highest rates. Since producitivity improvements in large companies generally come from automation, outsourcing, union busting and holding the line on wages and benefits, you generally would have less need of soup kitchens by letting these rates go back up.

  3. Ralph H  ::  11:41 am on September 30th, 2011:

    I suspect soup kitchens will be OK, the real losers will be the big ticket recipients, Universities, Hospitals, etc and the value of “naming right” donations. The after tax calculation is a bigger factor than for a small soup kitchen type donation.

  4. Jack B  ::  4:12 pm on September 30th, 2011:

    I agree with Vivian Darkbloom completely, but I realize that removing the charitable deduction and tax exempt status won’t happen unless there is a way to exclude religious organizations. Remember, this is religious America where religious belief trumps economic rationale.

  5. Lee  ::  10:57 am on October 2nd, 2011:

    Cantor’s desire to end the estate tax is another example of the same inconsistency described in the article. The estate tax, which is also a strong encourager of charitable donations by the wealthy.

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