The State: Charities Not Welcome

In his Tuesday (March 24th) evening press conference, President Barack Obama discussed his tax proposal for charitable gifts. Though his defense of the proposal (excerpted below) sounded reasonable, a little historical knowledge and a dose of reality shed some light on what, exactly, is happening: a multi-billion-dollar transfer of wealth from charities to the federal government, furthering the State's continuing attempts to hijack the role of charitable organizations, and thus gain greater control over its citizens.

But first, the facts. Under current law, the tax deduction for those with annual incomes greater than $250,000 is 35 percent. (In other words, a charitable donation of $100 realizes a deduction of $35 from taxable income.) By comparison, the tax deduction for those making less than $250,000 annually is 28 percent.

Under Obama's proposal, the playing field for tax deductions for charitable contributions would be leveled at the lower 28-percent rate. In his news conference, President Obama explained his reasoning for lowering the rate for those in the upper-income bracket:

“Let's go back to the rate that existed under Ronald Reagan. People are still going to be able to make charitable contributions. It just means, if you give $100 and you're in this tax bracket, at a certain point, instead of being able to write off 36 percent or 39 percent, you're writing off 28 percent.

Now, if it's really a charitable contribution, I'm assuming that that shouldn't be the determining factor as to whether you're giving that $100 to the homeless shelter down the street.

And so this provision would affect about 1 percent of the American people. They would still get deductions. It's just that they wouldn't be able to write off 39 percent.

In that sense, what it would do is it would equalize. When I give $100, I'd get the same amount of deduction as when some, a bus driver who's making $50,000 a year, or $40,000 a year, gives that same $100. Right now, he gets 28 percent, he gets to write off 28 percent. I get to write off 39 percent. I don't think that's fair.

So I think this was a good idea. I think it is a realistic way for us to raise some revenue from people who've benefited enormously over the last several years.

It's not going to cripple them. They'll still be well-to-do. And, you know, ultimately, if we're going to tackle the serious problems that we've got, then, in some cases, those who are more fortunate are going to have to pay a little bit more.”

Sounds reasonable, right? Why, indeed, should the so-called "wealthy" let such a venal motivation as a tax deduction direct their charitable actions?

As much as Obama tries to paint the tax-deduction issue with idealistic brush strokes ("I'm assuming that that shouldn't be the determining factor as to whether you're giving that $100 to the homeless shelter down the street"), reality begs to differ. As explained in a Washington Post editorial, Martin Feldstein (economics professor at Harvard University, president emeritus of the National Bureau of Economic Research) explains how a "substantial body of economic research" indicates that, for every 10-percent increase in tax deductions, people donate that amount more. Therefore, Obama's proposal to decrease the tax deduction by seven percent for people in the upper-income brackets will translate to a corresponding seven-percent decrease in charitable giving.

Obama's beseeching that deductibility does not influence charitable donations aside, the reality is quite the opposite. The greater tax deduction that people receive from charitable donations, the more they donate. Period.

The motivation is not hard to understand: most people have a set percentage of their disposable income they plan to put toward their favorite charities. If their "donations fund" has shrunk (via a higher tax rate), they are unlikely to tap into other funds (e.g., vacation, entertainment, etc.) to make up the shortfall; they will just donate the reduced amount. Logical enough.

Before I shift to the larger implications of this tax proposal, I would just like to pose the following question: if people in higher-income brackets have presumably greater disposable income, and you believe that donating to charitable organizations is a worthwhile endeavor, wouldn't you want to encourage them donate more, rather than penalizing them?

Not so fast, says the State. (Or it would, if it was honest.) Because, given a choice, politicians much prefer being able to control how money is spent, so their pet projects, Statist goals, and favorite interest groups can be funded and rewarded (at taxpayer expense, of course). Leaving more money in control of those who earned it means that the government must trust the individuals to fund the "correct" (i.e., State-approved) projects.

Does anyone think that taxpayers would voluntarily donate to each of the 9,000 earmarks in the recent spending bill? Of course not, which is why coercive action is necessary to force Americans to fund these initiatives.

But this argument holds true for an increase of any tax -- whether it be a sales tax, county income tax, state income tax, federal income tax, personal property tax -- or a decrease in tax deductions (which amounts to the same).

Why, specifically, does the State hate charity? Because charity is competition to the State for providing services to the community.

Before welfare existed, churches and other local community organizations provided temporary succor to those residents who hit a stretch of bad luck. Before Medicare and Medicaid, physicians would negotiate payment rates or terms for those in financial distress.

However, relying on local charities and charitable actions is not a one-way street; accepting assistance endowed the recipient with an obligation to repay the service he or she received, even if the repayment was simply a renewed effort to escape the unpleasant circumstances.

Thus, personal responsibility is reinforced and enhanced, which leads to a better and more productive citizenry.

However, the intrusion of the State into how individuals cope with adversity diminishes the need for personal responsibility. Do welfare recipients feel a greater or lesser obligation to repay the government, compared to their local charity? Do individuals feel a greater obligation to ensure they pay Medicare in full, or their local doctor?

Thus, the State's all-encompassing need for power and control -- and any who doubt this need merely has to look at Obama's plans for the federal government to assume a dominant role in health care, the financial sector, education, etc. -- crowds out the private sector, rewards those with connections to politicians controlling the purse strings, and leads to a gradual -- but inevitable -- diminished sense of personal responsibility in its citizenry.