The news is out. President Obama announced plans to cut the deductions for charitable contributions and mortgage interest incurred for Americans who earn more than $250,000 per year and raise the top tax bracket from 35% to 39.6%. I have some very sharp opinions about this proposal. For the sake of full disclosure, I voted for Obama but am a registered Republican. I vote issues and people, not along party lines. You might say I am socially liberal but fiscally conservative. That said, I have big problems with this proposal. Watch a CBS News Video about the plan here.
When I went to school to become a Certified Financial Planner Professional™, economics was one of the things they taught. Specifically, they discussed the role that taxes play within the government, how the Fed and IRS work, and how it is the job of the Executive Branch to drive an agenda through tax policy. Generally speaking, I believe Republicans perceive that adjusting taxes downward equals growth through increased investment, while Democrats view taxes as a way to redistribute wealth. While this is a simplistic way of looking at things, this is exactly the way I see the proposed tax changes that Obama introduced.
I believe that changes in tax policy direct our actions. For example, generally given the choice of withdrawing money from an IRA versus a taxable brokerage account, I would typically recommend that people first take from the taxable account because capital gains rates are typically lower than ones income tax rate that they would be subject to if withdrawing funds from the IRA account. The tax benefit drives the actions. Add a 10% penalty for an early withdrawal on top of an ordinary income tax rate, and the IRA quickly becomes the funding source of last resort. Taxes and penalties drive the behaviors of Americans. Good tax policy is meant to create healthy economies. That is exactly the opposite of what Obama’s proposal does.
Charities are struggling to keep their heads above water right now and the housing market has already gone under. The housing mess is the most pressing issue facing the economy in my view. While the government struggles to pay for all of the various “stimulus” packages, charities that provide essential services for the needy, the arts, and everything else are closing their doors in record numbers due to a combination of losses incurred from the stock market and lost donations from their donor base. In my opinion, the last thing the Obama administration should be doing is creating ANY disincentives away from charitable donations or from mortgage deductions. While some may say that this only impacts the wealthy, we all know how Wall Street has come to Main Street in the last year.
Mr. President, you should be INCREASING the mortgage and charitable deductions to INCENT people into these areas, not reducing them. Rich, poor, it doesn’t matter because while these initiatives may not take effect for some time, perception is reality when it comes to human assumptions. The dire economic situation that the nonprofit and real estate sectors face need all the help they can get in order to be put back on a more solid footing. I believe in the end, these moves do nothing but exacerbate an already bad situation in two of the areas that now require the most help.
Traditionally, charitable contributions have served as a great way to reduce taxes and everyone won. Charities provided services that the government wasn’t as good at providing, Americans got a tax deduction for funding them, and the government didnt’ have to do that job. Everyone won. By changing this balance now with charities struggling already, this will mean less donations, force charities to close due to ANOTHER financial setback caused by poor government policy, and put the onus of providing the services that these charities provided, squarely back on the government’s shoulders. This sounds like a very Democratic thing to do from a fiscal standpoint. As a fiscally conservative Republican, I fear the consequences this will have on the system at a time of such economic distress. There are lots of things I don’t agree with in the Republican party (like energy and environmental policies for one), but when it comes to this proposal, I would never side with the Democrats on this. It stinks.
Last year, I wrote a review of a terrific book called “Who Really Cares?”, about the giving habits of Americans, and specifically, Republicans versus Democrats. Since we are on the subject. It might be a good refresher for those thinking about cutting areas that impact giving. It was a great book that anyone interested in this subject should read.