Congress must weigh costs, benefits in revising tax code

GEORGE Soros and Donald Trump are polar opposites politically, but they do have things in common. Both are super wealthy, excessively opinionated and extraordinarily generous.

Americans who are similar to Soros and Trump— the storied 1 percenters — will be affected by pending tax code changes. What Trump wants from tax reform, and what Soros may fight, could dramatically influence the extent of charitable giving. Donations to nonprofit groups carry the incentive of tax deductibility.

Charitable giving faces a one-two punch if a soak-the-rich strategy is combined with a higher standard deduction. Not only would less money be available from the rich for donations, but average Americans wouldn’t have the incentive to itemize deductions for gifts made to charities. The donation deduction has been around for a hundred years.

In the same week that Soros announced plans to transfer about $18 billion to his human rights foundation, Trump’s tax reform push began its crawl through Congress. Nervously awaiting the outcome are leaders of nonprofits.

Such organizations have become increasingly dependent on the largesse of the Soros-Trump class. Any move to increase the highest marginal tax rates would thus decrease charitable giving. The same is likely true if a higher standard deduction impels most Americans to forgo itemization.

A new analysis published by the Chronicle of Philanthropy found that “the wealthy” now account for more than 75 percent of itemized donations. Meantime, the percentage of all households giving money to nonprofits is declining.

In the words of the Manhattan Institute’s Howard Husock, the “vilified rich” are not only responsible for most of Washington’s income tax receipts but also an increasing share of charitable giving.

“It’s in this context that changes in the tax code can have big — and negative — implications for charitable giving, in which the U.S. has historically led the world,” Husock says.

Charitable giving is “notoriously sensitive” to tax code changes, he said. A higher top tax rate would decrease the “price” of giving by raising the value of a deduction but also reduce the amount of after-tax income available for donations.

There is little dispute that nonprofits support society in broader, more efficient ways than government can. But a soak-the-rich strategy effectively propels government into taking up the slack when nonprofits have less to spend.

By raising top rates, “Congress will be playing with fire when it comes to providing support for civil society,” Husock argues. If you believe Washington can spend money better than charities, we have a nonprofit bridge to sell you.

Nonprofits also face trouble from the higher standard deduction proposal. One estimate is that fewer than 5 percent of taxpayers would continue itemizing. The incentive to donate will thus be lessened.

Giving by small donors is already in decline. In the past 14 years, the median number of small donors has fallen by 25 percent. The share of all household giving to charities has declined from 67 percent in 2004 to 59 percent in 2012.

The federal tax code is in dire need of reform, particularly at the corporate level. And while most people will continue to support charities regardless of deductions, Congress must carefully weigh the costs as well as benefits of tax code changes.