Eliminate Charitable Deduction?

Should charitable deduction be eliminated?  One former foundation president thinks so.

Jack Shakely, who ran the California Community Foundation for 25 years, recently wrote an opinion piece in The Los Angeles Times that is sure to cause some controversy in the nonprofit sector.  He proposes that the best way to reduce the national debt is to completely scrap the charitable-giving tax deduction.  If you've been following politics lately, you already know that capping charitable giving at 28% for the nation's highest earners has been a priority of the Obama administration.  They have tried it four times already, most recently in the American Jobs Act.  Each time it has failed after major backlash from nonprofits. 

Yet even with the administration's proposal, charitable deduction would remain in place.  If Shakely's suggestion was to be put into place, the deduction would completely disappear.  His reasoning comes down to this: After nearly a century of existence, nobody can say for sure whether it truly stimulates giving.  The argument has been put out there, most recently by Brian Gallagher of United Way of America, that capping charitable deduction for high earners at 28% would cause donors to "withhold the difference to cover the tax."  But is that really the case?

Shakely argues that it isn't.  He cites what happened when the cap on deductions for the top tax brackets was reduced in the past.  In 1980, it went from 70 percent to 50 percent, and then from 39 percent to the current 35 percent in 2003.  If stood to reason that giving should have declined as the cost of giving increased.  But according to the Giving USA Foundation, charitable donations over the last 25 years have remained consistent, staying around 1.7-percent and 1.95-percent of personal income.  If giving didn't decrease then, he argues, why would it decrease now?

All these examples are when the deduction was reduced.  Shakely's suggestion, however, is to get rid of it entirely.  Would that have any significant impact on giving?  It's hard to say because, as he argues, it's hard to pinpoint how much it really stimulates giving.  Regardless, the article is a great read, and we suggest you check it out if you have the time.