Compromising the Safety Net: How Limiting Tax Deductions for High-Income Donors Could Undermine Charitable Organizations
Tolan, Patrick E., Jr., Suffolk University Law Review
I. INTRODUCTION II. BACKGROUND A. The Charitable Donation Deduction: Then and Now 1. Inception of the Charitable Donation Deduction 2. Present Deductibility 3. 2013 Budget Proposal and Expiring Tax Cuts B. Justifications for the Deduction 1. Ideal Income Tax Excludes Charitable Donations from Income 2. Efficient Subsidy Theory 3. Equity Theory 4. Distributive Justice: Rawls Revisited 5. The Need for Salience C. Charitable Deduction Evolution Throughout the Years 1. Changes to Limit Deductions as a Percentage of Income 2. Changes to the Pool of Tax-Advantaged Donors 3. Rate Changes Throughout the Years a. Early Tax Rates: Wartime Spikes and Progressivity b. Major Rate-Change Reforms of the 1980s c. Post-1980s Rate Changes: Increases, Relief, and Sunsets D. How Giving Has Changed in Response to Tax Changes 1. The Early Years: 1913-1940 2. The 1940s and the Standard Deduction 3. Changes in the 1950s-1960s 4. Changes in the 1970s 5. Tax Reform in the 1980s 6. The 1990s to the Present III. DONATIONS DROP IN TIME OF SERIOUS RECESSION IV. ANALYSIS AND RECOMMENDATIONS A. The Charitable Deduction Should Not Be Reduced Now B. Severity of Proposed Tax Reform C. The Need for Continued Study V. CONCLUSION APPENDIX 1
"Charity is thus a blessed act that should suffer no discouragement from something so mean as the tax code." (1)
More Americans--46 million--are presently living in poverty than at any time in the past fifty years. (2) Even more disturbing, child-poverty rates have climbed to 22%, up from 16% just ten years ago. (3) As demand for social services peaks, many newly unemployed or others who have never before needed social services will turn to charities, specifically their churches, for services because they do not know about public assistance or how to obtain it. (4)
"Superstorm sandy" reminds us of how vulnerable people are to natural disasters as well as the critical role of nonprofit organizations in providing relief to disaster victims. (5) Nevertheless, whether our hardships are from natural or economic disasters, what is most evident is the crucial need for the services of the charitable sector to help those who are suffering.
Despite America's unparalleled modern economic hardship, President Obama has proposed reducing tax relief for wealthy taxpayers who donate to charity. (6) To the extent these changes could deter charitable giving, the government could unwittingly undermine the nonprofit safety net that insulates the government from being the only provider for the impoverished. (7)
The charitable donation deduction is different from other personal deductions because the beneficiaries include not only the donor, but also the charitable organizations and especially those they serve. Therefore, it should not just be lumped in with restrictions on other itemized deductions. Instead, consequences of a cap on deductions to the charitable sector must be intrinsic to any discussions impacting donations to the charitable sector so that our national leaders do not make ill-advised decisions, especially in the face of a struggling economy and peaking demands for charitable assistance.
This Article considers several rationales for allowing charitable donations and analyzes the potential consequences of implementing President Obama's budget proposal. America's largest donors are those in the highest marginal tax brackets; thus, efforts to limit the deductibility of their charitable donations could have a chilling effect on charitable giving. (8) This could be especially troublesome in our recent down economy, at a time when donations overall have dropped due to the recession and have never recovered. …