Replacing charity with government

The Obama administration truly is seeking to make government the replacement for charity donations. First they're planning to reduce the donation deduction for wealthier taxpayers. But since that raises concerns about how charities are going to survive, they're planning to replace the missed donations with government handouts.

In Obama's budget document, "A New Era of Responsibility -- Renewing America's Promise," the administration outlined a plan capping the tax rate that families with incomes over $250,000 can claim for itemized deductions at 28 percent. Those individuals subject to the 33 or 35 percent bracket who now claim itemized deductions at this rate will would find five to seven percent of their charitable contributions subject to income tax.

For example, a prospective charitable donor in the 35 percent bracket who gives a homeless shelter $100,000 under current law would reduce his income taxes by $35,000.

Under the Obama plan, the donor would only be able to deduct his gift at the 28 percent rate, meaning a $28,000 savings in taxes. This would mean an additional $7,000 in taxes and an almost 11 percent increase in taxes on the donation.

So, since people are rational, this will cause a decrease in donations. How to help the charities? Let government do it.

Lost in the coverage of the Obama Administration's 2010 budget proposal to limit the tax rate at which taxpayers can take itemized deductions for charitable giving is the administration's plan to create a government-financed fund that would mitigate losses charitable groups might suffer as a result of the tax increase on charitable giving.

"Obama is telling charities, 'Don't worry about the tax increase on your donors, government will be here to make up the difference if you have a down year because of my policies,'" says a Senate Joint Tax Committee staffer. "We're still trying to figure this one out, because it doesn't make a heck of a lot of sense."

Now, it might not make a lot of sense to raise the taxes with one hand in the hopes of gaining more revenue if you're going to then turn around and replace that revenue with a fund to dole out the sums to the charities. But it does make sense if your goal is to give the government control over which charities rate getting the donations rather than all that sloppy freedom we have when people choose which charities they want to contribute to.

According to a Senate Democrat aide, who has been briefed on the federal fund to offset charitable losses, the government funds would come with strings attached. "If, say, a Catholic hospital sought and received those funds, it would be required to adhere to federal polices on issues like abortion. Or the hospital could simply not seek the funds to make up the difference," says the aide.

I'm sure we'll see arguments about how much more rational it is to have government doling out the sums rather than letting some rich person pick where he wants his money to go. But America is a very charitable country and one of the beauties of how it works is that people can pick where they want their money to go whether it's to their kid's school, the local art museum, their family church or research for fighting a disease that their dad died from. People might argue over which of those recipients is worthier. But it's their money so let them decide. Let's not take that choice away from them by tinkering with the tax code and then replacing people's choices with some government fund that seeks to figure out the most deserving recipients.