2 March 2009
Charitable Donation Deduction Reduction
I felt a little bit like the Rev. Jackson while writing that title…
So, have you heard about a change coming to the US budget for 2010 regarding charitable donation deductions? I just read a blog post from Peter Orszag, the director of the Office of Management and Budget (OMB). Apparently, they will begin to limit the amount that “high-income” families can deduct from their taxes for charitable contributions. You can read the post here.
There are a couple of things that struck me immediately as I read through this. There is plenty of spin in this article to continue to preach to the lower and lower-middle class that the rich deserve to pay more. Although the statistics quoted may be entirely truthful, they are meant to lead the readers into a certain mindset. First, it states the threshold for a high-income family as “more than a quarter million dollars a year”. Although there is no difference between saying a quarter of a million or saying 250,000, I think there is a huge difference in perception between these descriptions. When most people hear the word “million”, they immediately think of something that is well beyond their reach and a number that they can never hope to attain when it comes to income. The also correlate this word with wealth or richness. On the other hand, 250,000 sounds a little more manageable and common. Although many may still consider this to be rich, it doesn’t have the same connotations as the word million does. In fact, most of these same people probably know some people that fall under this description. Doctors, Lawyers, small business owners, CEOs and upper management at many companies. This level is attainable for many families who make income their priority in life.
The next paragraph uses the 2008 tax rates for a joint filing.
The second thing that struck me especially annoying is the statistics of how much different classes of people save with this deduction. It raises the question of fairness between the tax savings of a teacher versus that of Warren Buffett or Bill Gates. They of course use this example because it is one of the biggest differences between tax brackets that they could have used. It states that if a teacher making $50,000 a year donates $1,000 to a charity, they will get a tax break of $150, but if Bill Gates gives that same $1,000 he will get a $350 deduction. Although there are many reasons that this true, yet misleading, I’ll just point to a couple of things. First of all, the obvious: Bill Gates gets a bigger tax break because he pays more. Let’s say that the Bill Gates family actually only makes $1,000,000 just to simplify the calculations. The teacher’s family makes $50,000 and pays $6,701 (13.4% of income) in federal taxes. The Bill Gates’ family makes $1,000,000 (20 times the teacher) and pays $321,575 (32% of income) in federal taxes. Although he makes 20 times that of the teacher, he pays more than 48 times the amount of taxes. Should they each only get a $150 tax break? Who is defining fairness here? Let’s go down to the example of a lawyer who makes $250,000. Again, the teacher pays $6,701 in taxes and the lawyer pays $61,328 in taxes. Hmmm….
I’m starting to think that I should be asking for a demotion at work. It’s looking tempting to drop my family into the 15% tax bracket versus the 25% tax bracket that I currently enjoy. I need to go run some numbers… Never mind. I guess my taxable income is actually well into the 15% bracket. Looking at my tax return, I see that I am taking full advantage of every deduction available to me. My taxable income is well below 50% of my gross income. Yay for me.
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4 Comments currently posted.
Mike says:
matthew says:
I agree. If not a flat tax, then a consumption tax. I guess a consumption tax would be more difficult on those who make less, but at least we would get something out of the millions who currently pay nothing. There is no reason for the complexity that has become the tax law. There is nothing fair about it and there will never be.
Chris Sumpter says:
I agree with you both. I shook my head through the whole OMB article. Only the morons in our society (and there are far too many of them) would be persuaded by such convoluted logic.
Business Tax Guru says:
I’ve been interested in taxations for lengthier then I care to admit, both on the individual side (all my working life history!!) and from a legal stand since passing the bar and following tax law. I’ve put up a lot of advice and righted a lot of wrongs, and I must say that what you’ve put up makes complete sense. Please uphold the good work – the more people know the better they’ll be armed to comprehend with the tax man, and that’s what it’s all about.
That’s why I always thought that Steve Forbes had the best idea when he proposed a “flat tax” for everyone, with no deductions, and regardless of income level.
I think this idea would solve a LOT of problems with our economy.