A New Big Idea: Create Jobs And Reduce Poverty By Doubling The Charitable Deduction
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WASHINGTON -- Even as the United States suffers from a staggering unemployment crisis and vast income inequality, the nation's wealthiest families are sitting on huge piles of unproductive cash.
So with nothing remotely like a second stimulus bill in the cards, the best hope for goosing the economy, creating jobs and providing relief for the needy could lie in a Washington economist's ingenious scheme to get a chunk of that money put into circulation right now, in helpful ways.
Isabel Sawhill, a budget expert at the Brookings Institution, is pushing to temporarily double the tax deduction for charitable giving, a move that would serve as a powerful incentive for the rich to significantly increase -- or at least accelerate -- their contributions to nonprofit organizations.
"We need to get them to spend that money instead of socking it away, and we need to get them to spend it on socially beneficial things," Sawhill told The Huffington Post. "This is simply a device to pry that money out of them."
There are lots of details still to be worked out. For instance, how do you limit the doubled deduction to donations that will in fact create jobs and/or provide services to the needy? Is there any way to only subsidize contributions beyond what people were already intending to give?
But there's something undeniably exciting about Sawhill's proposal -- and potentially appealing to people across the political spectrum.
"It strikes me as a terrific idea, an absolutely terrific idea," said Norman Ornstein, a resident scholar at the American Enterprise Institute. "You're going to get a significant increase in charitable contributions. And you're going to end up with the organizations that get those contributions being able to do more work and so they're going to hire more people."
Ornstein said there is a particularly urgent need for this sort of temporary action because "we know that this is going to be an excruciatingly awful year or two ahead for poor people."
At the federal level, budget cuts to discretionary programs are likely to have an outsized effect on the needy, he told HuffPost. And at the state and local level, with stimulus money drying up, drastic cuts in services such as Medicare and aid to poor families appear inevitable.
"If there's an ounce of humanitarian blood in people, you would want to find greater ways to get money to nonprofit institutions to fill those gaps," Ornstein said. "And if you can do it in a way that generates jobs, it's a win-win."
Ornstein even predicted that the idea could get significant political traction. Democrats are eager to create jobs, and "the reflexive reaction to Republicans of any tax cut is: 'Yes,'" he said.
Deficit concerns might cause some to balk -- "you're going to end up with some opposition to it," Ornstein said -- "but I think you might end up with enough bipartisan support."
The charitable deduction currently allows tax filers who itemize their returns to deduct contributions to nonprofit organizations from their taxable income. The deduction is therefore by its nature regressive, as it is more valuable the higher your tax bracket. But in this context, that's a feature, not a bug -- because Sawhill's prime target is people with deep pockets.
The lure for them would be strong. For taxpayers in the top two brackets, roughly 75 percent to 80 percent of any contribution would be tax-deductible.
And while most Americans would be hard-pressed to suddenly increase their donations to charity, the richest are sitting on a staggering proportion of the nation's wealth. The richest 1 percent, in fact, account for 35 percent of the nation's net worth.
"The problem with the rich is they're not spending their money. And when they are spending it, they're spending it on baubles, and luxury vacations," Sawhill said.
Indeed, high income inequality of the sort America is experiencing now prolongs a recession or depression, because when the rich are "squirreling away" so much of the country's money, "that makes it hard for the economy to grow or recover," she said.
When you start talking about how to formulate a law that would make sure the new wave of charitable donations get to the right places, however, things get complicated in a hurry.
Few taxpayers would be pleased to find themselves paying for 80 percent of a billionaire's vanity gift to an organization that has nothing to do with helping the needy. Depending on your values, you might not be pleased when what is supposed to be a job-creating, poverty-fighting measure subsidizes donations to the National Rifle Association, or an abortion-rights group, or a prep school.
Sawhill's main concern is that the money be spent, not saved -- not, in other words, simply moved from one savings account to another. "The best way I can think of to handle this right now is to insist that the funds be used for operating expenses," she said. But that might be impossible to enforce.
As for picking between charities, the IRS classifies every nonprofit organization according to a National Taxonomy of Exempt Entities, which could conceivably be used to identify which organizations would or would not qualify for the double deduction.
But Thomas H. Pollak, program director of the National Center for Charitable Statistics, warns that "implementing this kind of thing would be pretty hard from where I sit." For instance, some nonprofits do lots of different things, or might dispute their classifications -- which have historically only been used for research purposes, not to treat them differently.
"I think you could do some targeting," Sawhill said. "But if you try to make a proposal that is so narrowly drawn that it doesn't provide for some slippage, you're not actually going to be very successful. The idea is to allow the American public to give to things that they want to give to, that we think are socially beneficial, without defining that too closely."
The plan is also a budget-buster -- a massive increase in a subsidy (or "tax expenditure") that already reduces federal tax revenues by something like $50 billion a year.
Plus it comes at a time when deficit-cutting proposals have actually called for the charitable deduction to be reined in or fixed, rather than expanded.
Richard Thaler, an economics professor at the University of Chicago, has argued that the deduction is terribly unfair and needs to be thoroughly redesigned. Some progressive groups have suggested it be scrapped and replaced with a less regressive 25-percent tax credit. (Interestingly enough, back in 1995, it was Republicans who were pushing for a tax credit that would enable federal taxpayers to divert $500 of their federal taxes directly to poverty-fighting charities.)
"It's a great idea if it means more money for the nonprofit sector and if it goes to organizations that are doing good work that is needed at this time," said Niki Jagpal, research and policy director at the National Committee for Responsive Philanthropy. "But the problem with it is that it will leave in place a regressive tax system that rewards the wealthy for their charitable giving more than people who are not as well off. And that's simply unfair."
Sawhill's proposal, incidentally, would not apply to the big corporations and banks said to be sitting on as much as $3 trillion in unproductive cash themselves. Robert Pollin, an economist at the University of Massachusetts at Amherst, has suggested a way to get that money into circulation as well -- but because his proposal calls for new taxes, it is profoundly unlikely to get any Republican support.
Sawhill originally pitched her idea in October, as a substitute for extending the Bush tax cuts to the very rich. "Obama could argue that he was providing a new, if temporary, benefit tilted toward high-income households, while encouraging them to spend the money in socially productive ways," she wrote.
Of course, it's too late for that now.
But her idea still may be the likeliest option to give the economy -- and the unemployed, and the poor -- a fighting chance.
CORRECTION: A line questioning how to craft the plan to avoid the Alternative Minimum Tax was deleted from this article after its original publication. Charitable deductions allowed under regular tax are in fact allowed under AMT.
Dan Froomkin is senior Washington correspondent for the Huffington Post. You can send him an e-mail, bookmark his page; subscribe to RSS feed, follow him on Twitter, friend him on Facebook, and/or become a fan and get e-mail alerts when he writes.
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First Posted: 01/26/11 10:50 AM ET Updated: 05/25/11 07:25 PM ET