The two-barrelled attack on charitable giving

Gregory Helvering, a tax lawyer using a pseudonym, exposes how Obama's tax proposals in his new budget works on two paths to decrease charitable giving. First, by raising the marginal tax rates, people might be encouraged to give more to charities.

Taken alone, an increase in tax rates would result in more charitable giving: if one receives a 39.6 percent benefit from giving to charity, and one previously gave $1,000 at an after-tax cost of $650 (based on a 35 percent deduction), one can now give $1,076 at the same after-tax cost of $650.

In addition, higher tax rates might increase charitable contributions even beyond that, since higher rates also have a psychological effect. When the state and federal government together take close to 50 percent of the income of top-bracket taxpayers, those taxpayers increasingly prefer giving money to charity rather than sending it to government.

But then, Obama and his budget director Peter Orszag take away that incentive for increased giving by lowering the level of the tax benefits for giving.

By simultaneously increasing tax rates to 39.6 percent and decreasing the tax benefits of deductions to 28 percent, the government can (a) eliminate the increased tax incentive for giving and thus protect its new revenue; and (b) at the same time, reduce the tax benefit for the giving already occurring and thus generate even more money for the government. The government keeps its higher revenues that might be reduced by increased contributions, while the charities see existing contributions fall (since the tax cost to contributors of even the existing level of contributions increases). There is an effective shift of money from private charity to government -- the exact opposite of what would occur if there were only a single whammy (an increase in tax rates).

But never fear, what the government takes away from the charities, they also plan to create a fund to give out more government grants to charities. Orszag told skeptics about lowering the level for the deductions that Obama has a plan.

"Contained in the recovery act, there's $100 million to support nonprofits and charities as we get through this period of economic difficulty."

So the government will get to decide which charities are worthy of government aid, not the individual citizen. So we'll put more power in the hands of Obama's chosen budgeteers, but we'll change the model that has made the United States the most charitable country on earth. I guess that depending on individual choice just imparts too much freedom for the Obamanians. They seek a more European model to place government in control. Even in my own family, my husband and I have make different choices on where we'd like to send our charitable donations. Multiply that across the country and we have a tremendous variety demonstrated through our generosity.

I suspect that the reduction in the deduction benefit is one part of the Obama budget plan that will not pass through Congress. As the Wall Street Journal points out, this is an issue that has united conservatives and liberals in opposition. Both sides of the aisle regard that charitable deduction as something near sacred and even the prospect of Europeanizing our charitable giving can't trump that.