One of President Obama's proposed tax increases involves limiting itemized deductions for higher-income taxpayers. According to The New York Times, everyone in the 35 percent bracket and many people in the 33 percent bracket would be treated, for the purpose of calculating deductions, as if their marginal rate were 28 percent. Hence a $10,000 charitable donation that currently reduces the tax bill of someone in the top bracket by $3,500 would instead be worth $2,800. The Times explains the official rationale for the change this way: "The White House says it is unfair for high-income people to get a bigger tax break than middle-income people for claiming the same deductions or making the same charitable contributions." The equity argument here is questionable, since the reason high-income people get "a bigger tax break" is that they pay more in taxes to begin with, not just in absolute terms but proportionally. In other words, this is the natural result of having a progressive income tax. Note that the unfairness perceived by the Obama administration also could be remedied by eliminating deductions or by taxing everyone at the same rate.
To my mind, those are both good ideas, but the government is not likely to stop using the tax code for social engineering anytime soon. And assuming that tax deductions aimed at encouraging certain kinds of behavior work as advertised, reducing them should be expected to result in less of the desired behavior. Hence the worries about how Obama's tax plan will affect charitable donations:
"This will lead people to give less to charities if they behave the way they've behaved in the past," [Roberton Williams, senior fellow at the Tax Policy Center,] said. "We've already seen a drop in giving as a result of the economic collapse. On top of that, this will just reduce the amount of giving."
Asked about that, Office of Management and Budget Director Peter Orszag said Mr. Obama took care of that by giving charities government money to make up part of the difference.
"Contained in the recovery act, there's $100 million to support nonprofits and charities as we get through this period of economic difficulty," he said.
In essence, then, Obama plans to take money people otherwise would have given to the charities of their choice and give it to the charities of his choice. In a similar maneuver, Obama is floating the idea of taxing health insurance to pay for health insurance:
To finance health care reform, administration officials suggested to senior aides in Congress on Wednesday that revenues could be raised by ending the policy of excluding the value of employer-provided health insurance from income taxes.
But the officials emphasized that the administration was not advocating that option, which not only is anathema to some in organized labor and business but also conflicts with Mr. Obama's position in last fall's presidential campaign.
I'm not sure I understand the distinction between suggesting something is a good idea and advocating it. But assuming that Obama really does want to tax employer-provided health insurance, he may be onto something. The government should stop encouraging businesses to give employees medical coverage in lieu of cash or other benefits, a policy that perpetuates the artificial link between employment and health insurance. That link, in turn, impairs mobility, fosters anxiety and insecurity, contributes to rising health care costs, and retards the development of a competitive and flexible health insurance market. But the problem can be fixed without a net increase in taxes. One approach, backed by George W. Bush, is to allow a standard deduction for medical expenses, whether they're paid by individuals or by employers. During last year's presidential campaign, John McCain suggested a variation on that theme, a tax credit for medical coverage that would go directly to the insurer chosen by the taxpayer. Another option, which I'd prefer in the interest of a simpler, less intrusive tax code, is to compensate for the increase in taxable income by cutting rates. For Obama, of course, raising revenue is the whole point.