Research Desk estimates: How much would revenue Obama's charitable giving proposal produce?

By Dylan Matthews

wswest asks:

At some point, the Obama campaign had proposed limiting the deduction for charitable contributions (including to religious org's) to a base percentage rather than allowing deductions at the individual's highest marginal rate -- was that plan dropped?

The deduction change wswest is talking about was first proposed in Obama's fiscal 2010 budget, and after being blocked in that budget cycle it has reemerged in the fiscal 2011 budget proposal. It would change the treatment not just of the charitable giving deduction but of all itemized deductions. Because deductions are applied to the taxpayer's overall income, which is then subject to various tax brackets, they provide more benefit for high earners. People in the top tax bracket would see their tax bill reduced by 35 percent of, say, their charitable giving, whereas lower-income earners would see the bill fall by only 10 percent of their donation.

The Obama proposal seeks to make this more progressive by limiting deductions by those making more than $250,000 a year to 28 percent. That is, if taxpayers are in the 35 percent bracket, their deductions will reduce their tax burden only by 28 percent of their value, as opposed to 35 percent now. The Joint Committee on Taxation has estimated (PDF) that the entire proposal would raise $289.3 billion over 10 years.Many critics of the proposal have warned that it would reduce charitable giving considerably, but a study from the Center on Philanthropy at Indiana University suggests otherwise. The proposal would reduce total itemized giving by 2.1 percent, or $3.87 billion out of $186.65 billion in total giving. This figure is dwarfed, however, by the drop in giving caused by the economic downturn. A 100-point change in the S&P 500 results is correlated with a $1.85 billion change in giving, and a $200 billion change in personal income is correlated with a $4.32 billion change in giving, according to the center.

It's also worth noting that this is not the only proposal formulated for changing the charitable giving deduction. Seth Giertz at the University of Nebraska at Lincoln has looked into the effect of several changes, including requiring a certain level of giving before it's deductible and making the deduction available to taxpayers who do not itemize, and estimated the impact on the budget in this paper (PDF), if you'd like to read more.

Tax - Tax deduction - Itemized deduction - Tax bracket - Charitable contribution