Is Obama’s Plan to Cut Charitable and Mortgage Deductions Really Stimulus?

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.

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13 responses to “Is Obama’s Plan to Cut Charitable and Mortgage Deductions Really Stimulus?

  1. Without siding one way or the other, the basic idea is to tax the people who benefited the most from the boom times to keep society from chaos. It may cost less in the long run to be sure the people in most need get some help as the true cost of letting society erode would lead to massive tax increases down the line. Plus, these are the same rates as during the roaring Clinton economy, and people making 250k plus have saved loads of money from the Bush tax cuts.
    It is sad to see any reduction in the deduction limits to charities.

    • Smith,

      I would be willing to bet money that any savings under Clinton you speak of were wiped out in the collapse of the RE and stock market meltdown.

      Raising taxes on areas of the economy is not a way to help anyone in my opinion. I do not believe that the real estate recovery will improve by lessening one of the most powerful tax incentives ever, the mortgage tax deduction.

      I love a good debate and certainly respect your opinions even if mine differ. Thanks for commenting and hope you visit again.

  2. Jude

    Richard, I’m usually right with you on everything you post here, but we differ on this one.

    1st – the mortage interest deduction. During the last election cycle the idea of “redistribution of wealth” came up over and over, and this is an example of that very idea. This is a tax deduction where the average taxpayer supports a deduction on the interest paid by rather wealthy individuals. Most middle class homeowners don’t benefit from the mortgage interest deduction since it would have to exceed their standard deduction to make it worthwhile, and even then they only benefit to the extent that they paid more in interest and other itemized deductions.

    2nd – changes to charitable deductions. Most people we have worked with donate from cash flow to a cause that they’re passionate about, and the deduction is bonus. Do you really think that a wealthy family won’t make a donation because they get a 20% deduction on charitable donations rather than the marginal tax rate deduction they received previously?

    • Hey Jude, (Wasn’t that famous someplace?)

      Re: Mortgages
      The real estate market is a mess. Anything that is done in the way of creating a disincentive is bad in my opinion, regardless of who it will impact the most. The government needs to be creating incentives to spur a real estate recovery, not creating ANYTHING to to discourage it.

      Re: Charitable Deductions
      Yes, I concur that most people make charitable contributions because they want to, not because of the deduction. Bank of America reported today that only 7% of high net worth clients they surveyed responded they would give less because of the proposed tax change. While that sounds great, adding a 7% reduction to an already bad situation makes the problem worse, not better.

      Bottom Line:
      Tax INCENTIVES are what the situation calls for in my humble opinion.

  3. Jude

    Here’s a link to Peter Orszag’s blog for his take on the charitable issue….

  4. Haley

    All of you people that are arguing with Richard are living in outer space. Ever heard of the tax multiplier? Helloooooooo.

  5. Okay, so I used to work at a wealth management firm with $500 M in assets under management and can guarantee you that it was the accountants who decided how much the majority of our high net worth clients contributed to charity. Sure, they chose the charities that they were passionate about, but not the value.

    Charities will go under with Obama’s plan. But I’m beginning to think that is what he wants.

    These charities exist to correct inefficiencies within the Government’s ability to provide an equivalent service, and Obama appears to be so disillusioned that he actually thinks he can tax everybody and distribute that through a Government system that provides for all.

    That is impossible. As much as people hate the greed that is so visible in a capitalist system, power is balanced and everyone has an equal chance at wealth. Obama’s new socialist plan reduces our freedoms and will undoubtedly screw things up in the long run. Take a look some other government run socialist initiatives – social security for example – that sure turned out to be a good idea.

  6. Told Ya

    Looks like “America’s chickens done come home to roost”! What amazes me is that anyone is shocked or surprised by ANY of this. We elected a cadre of commited Marxists/statists, whose fundamental belief is the deity of the state (since they have no other god). Marxism is a religion. If you look closely, it is a twisted counterfeit of biblical religion (see Gary North’s “Marx’s Religion of Revolution”). They told you who they were during the election cycle, if you were interested enough to listen & poke around.

    Every culture has, and serves, a god, either explicitly or implicitly. That god is the source of life, salvation and authority w/i that culture. A messianic state (which sees itself as the saviour of all, and source of everything needed for life) cannot tolerate idolatry (“any other gods before its face”). Any private charity is a threat to the power of the almighty, and serves another source of salvation and authority. Thus, it cannot be tolerated. The gradual elimination of all sources of aid, other than the state, is fundamental to their worldview.

    They are not bomb-throwers, they are gradualists, because their faith is that, since their w/v is correct and the ultimate triumph of the state is inevitable, they will wait and accept incremental progress. They have a secularized version of biblical post-millenialism.

    The reason we are even having this discussion is that, over the last century, we have been conditioned to accept minute pieces of a statist w/v. We already were well down the road to this, but in subtle ways. We have accepted, even praised, the trashing of constitutional limits on government.

    Marxism is an egalitarian religion. It wants to eradicate all evidence of the true God, including any evidence of His covenantal blessing and cursing in space & time. It desires to eliminate any economic (or any other) advantage produced by generational faithfulness. We have tolerated this nonsense, while the statists have progressively built a slam dunk voting majority of those with their snoots in the trough. They may have won, for now.

  7. Catherine

    I cannot help but ask how anyone who is fiscally conservative and knowledgable, as you clearly are, could possibly have voted for Obama. His economic proposals for spending, tax increases and redistribution were so incredibly, blatantly liberal. The republicans weren’t offering a stellar candidate, but as your vocation and area of expertise is in the field of economics, I marvel at your ability to cross the expanse from fiscal conservatism to Obamanomics in a single election cycle. That’s quite a trek. You must be exhausted.

    • Catherine,

      Thanks for your comments. I believe that it is the government’s responsibility to create policies that encourage favorable economic conditions, among other things. I believe in capitalism and the power of markets, however I also believe that those same forces have rough edges (many of those edges are cutting lots of people right now), and that it is the job of the government to help smooth out the areas when capitalism is unable to deliver. Being of this view, as a fiscal conservative I generally believe that lower taxes, deductions, and credits encourage prosperity and direct people in the right direction. From a liberal perspective, I believe that some people need assistance to get back on their feet and help to become productive members of society. I believe that right now, higher taxes are inevitable and necessary to fund the things that the rough edges have helped to create. That does not make me any less of a fiscal conservative, only realistic that we are living in extraordinary times and that the times call for extraordinary measures. In this article, I outlined the fact that cuts to the mortgage interest and charitable contribution deductions are an extremely bad idea because these areas are already hurting and taking any steps to cut incentives in these areas can only add to the problems. In an ideal world, we would encourage the wealthy to invest in education, health care, and energy initiatives through tax incentives and penalties for non compliance. If Americans who owned gas guzzling vehicles (except businesses that depend on them) were forced to pay a gas guzzler tax, we would see more adoption of energy efficient vehicles. This is being specific with well thought out tax strategy, unlike what we are seeing now. Unfortunately, no political party is perfect and as Americans, we are lucky enough to have the opportunity to make another choice every 4 years.

  8. thelegacylawyer

    “Is Obama’s Plan to Cut Charitable and Mortgage Deductions Really Stimulus?” No, of course not. But then, I don’t think he ever said it was. It’s a reduction of a tax break.

  9. Pingback: Daily Reading! « Kesav K’s Blog

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