Taxes

Obama Enlists Reagan to Defend His Limits on Tax Deductions

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As Matt Welch noted earlier today, at last night's press conference President Obama defended his plan to tax charitable contributions with a reference to Ronald Reagan:

What we've said is: Let's go back to the rate that existed under Ronald Reagan. People are still going to be able to make charitable contributions. It just means, if you give $100 and you're in this tax bracket, at a certain point, instead of being able to write off 36 percent or 39 percent, you're writing off 28 percent.

Peter Orszag, Obama's budget director, also name-checks the Gipper in his defense of the plan to limit deductions:

We are not eliminating the deduction—just reducing it to 28 percent (or $280 on the hypothetical $1,000 contribution) for the 5 percent of families at the very top of the income distribution. That is the same tax benefit that they would have enjoyed at the end of the Reagan Administration. 

A casual listener or reader might gather that Reagan supported the idea of making charitable contributions less than fully deductible for upper-income taxpayers, or at least that such was the policy by the end of his administration. In fact, however, top earners deducted reduced their taxes by 28 percent of their donations in 1988 because they were subject to a 28 percent income tax rate. Today, since the top rate is 35 percent, they deduct reduce their taxes by 35 percent of their donations. Obama wants to raise the top rate to 39 percent (by letting the Bush tax cuts lapse) while reducing deductibility the tax savings to 28 percent of charitable contributions, meaning that the contributions would be taxed at a rate of 11 percent for people in the top bracket.

Instead of simply saying this change is a handy way of raising money from people who can afford it, Obama administration argues that it eliminates an unfair advantage for the wealthy:

What it would do is it would equalize—when I give $100, I'd get the same amount of deduction as when…a bus driver who's making $50,000 a year, or $40,000 a year, gives that same $100. Right now, he gets 28 percent; he gets to write off 28 percent. I get to write off 39 percent. I don't think that's fair.  

This year, actually, Obama would get to deduct reduce his taxes by 35 percent of his contribution. But his point stands: Why should rich guys get a bigger deduction tax reduction for the same contribution? Maybe because they pay more in taxes to begin with. As I've said before, this is a natural result of combining deductions with progressive income tax rates (neither of which is necessarily a good idea).

Obama's other pretense here is that taxing charitable donations won't reduce them. "If it's really a charitable contribution," he says, "I'm assuming that that shouldn't be the determining factor as to whether you're giving that $100 to the homeless shelter down the street." But the whole idea of making charity deductible is to encourage more of it. It stands to reason, then, that making it less deductible will discourage it at least a little. At the margin, making philanthropy more expensive is bound to result in less philanthropy. Reasonable people can disagree about the size of this effect and about whether Obama has better plans for the money he is in effect diverting from charitable organizations. But denying that any such diversion is occurring sounds a lot like, you know, the way politicians usually behave. What is the phrase I'm looking for?

Clarification: As a couple of commenters pointed out, Obama wants to reduce the deductibility of charitable contributions for people in the top bracket from 100 percent (meaning that if your income tax rate is 39 percent, a $10,000 donation reduces your taxes by $3,900) to 72 percent (meaning your tax rate is still 39 percent, but a $10,000 donation reduces your taxes by only $2,800). For someone in the 36 percent bracket, deductibility would be reduced from 100 percent to 78 percent (cutting the tax reduction for a $10,000 donation from $3,600 to $2,800). I've adjusted my language above a bit to clarify the distinction between the deduction (the reduction in taxable income) and the resulting tax savings. Another way to look at it (as I suggest above) is that Obama wants to start taxing heretofore tax-free charitable donations (along with other expenditures that currently are 100 percent deductible) at a rate of 8 percent or 11 percent, depending on the bracket.

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  1. Truly, they have a dizzying intellect.

  2. Obama is reaching out to the most hardcore Republicans and all they do is bite the hand trying to feed them.

    Pathetic.

  3. It seems math is not a strong suit for Obama.I have to believe he knows the truth.

  4. Interesting angle, though. Next election cycle, Libertarians can run on “the same tax benefit of the FDR administration” — when the top rates were, I dunno, 79% or something.

    So, you pay 39%, but for your deductions, you take 79% off.

    In fact, the Repuddlekins oughta make that argument right now.

  5. “Charity” is a misnomer. Forking money over to Pat Robertson types should be classified as a lobbying expense.

  6. Wait till I get going!

  7. Virtually every word that comes out of Obama’s mouth is a lie.

    That’s all you need to know about him.

  8. By now, I’ve grown accustomed to double speak from Obama.

  9. You’ve beaten my Geithner which means you must have studied and in studying you must have learned that politicians are mortal so I can clearly not choose the wine in front of me!

  10. sounds a lot like, you know, the way politicians usually behave. What is the phrase I’m looking for?

    Uh, “complete horseshit”?

  11. Obama is reaching out to the most hardcore Republicans and all they do is bite the hand trying to feed them.

    Pathetic.

    Indeed. Libertarians have an inflated view of the benefits that “voluntary” donations to charities provide to society in general. The fact is that public programs such as Head Start are far more effective than your loony, right-wing 501c3’s. Transferring resources from the failed “civil society” to the public sector is therefore justified.

    Yes, I said it: government works better than nonprofits.

  12. Right now, he gets 28 percent; he gets to write off 28 percent. I get to write off 39 percent. I don’t think that’s fair.

    Drink!

  13. Progressive rocks!

  14. Of course, if we really want to take this analysis to its logical conclusion, we would just compare the taxpayer’s marginal tax rate to the 28% rate that contributions would be benefitted, but we would instead compare the effective tax rate of the taxpayer to the tax benefit rate of the contribution.

    If we did that, we’d see in most cases that the taxpayer is actually getting a much larger benefit on their deductions (even at 28%) than the actual rate at which they are paying tax on their income.

    The whole marginal tax rate system confuses all sorts of arguments like these.

  15. Damn … forgot a “not” (I do this way too often). s/h/b “we would NOT just compare …”

  16. I’m assuming that that shouldn’t be the determining factor as to whether you’re giving that $100 to the homeless shelter down the street.

    He’s right of course. It will, however, be the determining factor when I decide how many billable hours I will work. If Obama wants 39 cents on the dollar for the federal government he better get to used to less gross tax revenue because it ain’t worth my time to work if I see less than half my rate after income and payroll taxes.

  17. I’m embarrassed to be a lawyer.

  18. Jeebus, Reason, way to follow Obama’s lead in mangling this issue.

    In fact, however, top earners deducted 28 percent of their donations in 1988 because they were subject to a 28 percent income tax rate. Today, since the top rate is 35 percent, they deduct 35 percent of their donations.

    You don’t deduct the percentage of your charitable contributions that corresponds to your top rate. You deduct 100% of the contribution.

    That, in turn, reduces the taxes you pay at the top rate.

    Obama wants to raise the top rate to 39 percent (by letting the Bush tax cuts lapse) while reducing deductibility from 100% to 28 72% percent*, meaning that charitable contributions would be taxed at a rate of 11 percent for people in the top bracket.

    *28 being 72% of 39.

    Of course, what Orzag says is actually worse:

    We are not eliminating the deduction-just reducing it to 28 percent (or $280 on the hypothetical $1,000 contribution)

    Instead of being able to deduct 100% of your contribution, he would only let you deduct $280. Now, either he is an incompetent fool who obviously has never made (and deducted) a charitable contribution in his life, or he and Obama are actually trying to pull a fast one and reduce the deduction for charitable giving by 72%.

  19. Perhaps the Democrats view private charities as competition? And a lot of them are made up of evil religious folk that are probably Republicans.

  20. What? Obama and Orszag lie?

    I’m stunned. Shocked.

  21. It should also be noted that Reagan’s 28% top marginal rate was much different than our marginal rates today. That 28% recast one’s income at the lower tax brackets into the 28% bracket. So using today’s mechanics, that 28% tax rate was actually a 33% top marginal rate (the extra 5% being the catch-up of the lower tax rates).

  22. Perhaps the Democrats view private charities as competition? And a lot of them are made up of evil religious folk that are probably Republicans.

    Now you are getting the Progressive ideas.

  23. You guys would whine no matter what the starting and end rates were so long as rich people have to pay a little more.

  24. Yes, I live to help out the rich as much as possible.

    TofuSushi,

    At long last, I have achieved enlightenment.

  25. Shut the fuck up, Barack Obama.

  26. Geithner ‘open’ to China proposal for Global Cutrrency:

    Geithner, at the Council on Foreign Relations, said the U.S. is “open” to a headline-grabbing proposal by the governor of the China’s central bank, which was widely reported as being a call for a new global currency to replace the dollar, but which Geithner described as more modest and “evolutionary.”

    “I haven’t read the governor’s proposal. He’s a very thoughtful, very careful distinguished central banker. I generally find him sensible on every issue,” Geithner said, saying that however his interpretation of the proposal was to increase the use of International Monetary Fund’s special drawing rights — shares in the body held by its members — not creating a new currency in the literal sense.

    “We’re actually quite open to that suggestion – you should see it as rather evolutionary rather building on the current architecture rather than moving us to global monetary union,” he said.

    http://www.politico.com/blogs/bensmith/0309/Geithner_open_to_China_proposal.html

  27. Why not just assume that what Obama says is how he actually feels, that it is unfair for the wealthy person to be able to deduct more from his givings? Then disagree with him, sure, but this “oh God he’s lying because he just wants to feed the monster government” stuff is equal parts speculation and silly.

    I mean, I hated Bush, but when he said he thought his torture and such were necessary to protect Americans I really thought he meant it. I just thought he was wrong.

    It strikes me that many libertarians have a very sour view of human beings and their motivations, unless of course those human beings are business owners, in which case we can trust them as far as the day is long.

  28. Right on MNG!

    You forgot Card Check.

    And I would rather live in Washington, DC than in Gaza.

  29. TofuSushi
    Speak truth to power brother, noone knows what you’re all about.

  30. I have a negative view of people in power who fuck up my rights and the economy. I don’t care about their motives.

    And Obama clearly can’t be trusted–he’s shown a clear disinterest in the truth already.

  31. Pro
    You really think the fair way to characterize this is a clear disinterest in the truth?

    As I understand it under Reagan top earners were taxed at a 28% rate, and could deduct 28% of their givings. That top rate changed, as did the deduction. Obama wants to raise the rate but reduce the deduction down to 28%. And when asked “hey, what about reducing the deduction” he says “well, it’s the same 28% people were paying under Reagan.”

    So OK, if you analyze it more and bring in the rate increases since Reagan you get this different take, but it’s not like some obvious lie here.

  32. I mean, the only honest way to answer the question was “I am reducing the deduction on giving to 28%, which is where it was under Reagan, but of course at that time the top income tax rate was 28%, and since then it has gone up to 35% with a corresponding rise in the deduction rate, and I want to increase the former while reducing the latter, but to Reagan era levels, yes.”

    Nothing less that than would satisfy you

    Sheesh

  33. It wasn’t true, so it shouldn’t have been used as an analogy. And there’s little chance he didn’t know that.

    Never trust a lawyer when he’s talking, unless he’s proven his trustworthiness to you over a prolonged period.

  34. PL,

    Come on. MNG is right. Just look at his post.

  35. Perhaps the Democrats view private charities as competition? And a lot of them are made up of evil religious folk that are probably Republicans.

    Of course they do. The first thing totalitarians do is destroy civil society.

    It strikes me that many libertarians have a very sour view of human beings and their motivations, unless of course those human beings are business owners, in which case we can trust them as far as the day is long.

    Strawman spotted! I couldn’t care less about the motivations of business owners because I’m not forced to deal with any of them. Government officials, however…

  36. What kind of self-respecting mind follows this kind of statement:

    “Perhaps the Democrats view private charities as competition? And a lot of them are made up of evil religious folk that are probably Republicans.
    Of course they do. The first thing totalitarians do is destroy civil society.”

    With this one: “Strawman spotted!”

    And with no sense of irony apparently…

  37. It wasn’t true?

    The deductions for giving were not at 28% under Reagan?

    Maybe you feel like he left out something important, but that part of the statement was most literally true bro.

  38. “And Obama clearly can’t be trusted–he’s shown a clear disinterest in the truth already.”

    I am not a crook.

  39. Exactly MNG!

    Now, you fools, stop arguing with the smartest guy on the board. Especially you cheating tax accountants.

  40. Who said I was self-respecting? 😉

    Anyway, it was hyperbole. Though that’s becoming less true by the day.

  41. Reminder to peanut gallery – Cato has long advocated killing off the charitable tax deduction provisions.

  42. There are no rates assigned to deductions.

    The total dollar amount of deductions are subtracted from gross income to arrive at taxable income.

    The EFFECT of a deduction is to reduce the tax liability by by product of multiplying the tax rate by the deduction dollar amount.

    That’s the way it always has been.

    What Obama is essentially saying is that it is unfair for the effect of the tax deduction to remain a function of the tax rate and should be changed to something else to stick it to the “rich”.

    Of course the “rich” already had it stuck to them by requiring them to pay a higher tax rate in the first place.

    And that is what is really unfair.

  43. Reagan’s first swag at a top rate was 50% in 1981. He then raised taxes from there to deal with the 1982 recession and deficit.

    I personally liked Reagan – he talked to his rivals and dealt with changing economic conditions rationally rather than politically.

    It wasn’t until Baby Bush and the fundie takeover of the GOP that the party went batshit crazy.

  44. or he and Obama are actually trying to pull a fast one and reduce the deduction for charitable giving by 72%.

    Applying Occam’s razor here, then the answer is that the acolyte of Ayers is really:

    Trying to pull a fast one on everybody.

  45. Quoting myself from the other thread earlier today:


    I would like to enter a semantic argument with Obama here: You dont deduct your tax rate % of the donation. You deduct the entire donation.

    The deduction comes off of income.

    It is not a tax credit after taxes are calculated, it is an adjustment to taxable income.

    Every time I hear him make this argument, it just makes him sound stupid. Or devious. Or both.

    Im going with both.

  46. MNG is as stupid or devious as Obama. Im going with the first.

  47. Shortest way to say what me and others are saying:

    Deductions occur at the margin.

  48. It wasn’t until Baby Bush and the fundie takeover of the GOP that the party went batshit crazy.

    We shall not see the likes of Barry Goldwater for a while I fear.

    If we do, I may give the Republican Party a look. But not now.

  49. It wasn’t true?

    The deductions for giving were not at 28% under Reagan?

    Not true at all. the deduction was 100% under Reagan. 100% of qualified charitable giving was deducted from income.

    What that meant as far as taxes go was determined at a later time.

    Deductions come off income.
    Tax credits come off taxes.


  50. We shall not see the likes of Barry Goldwater for a while I fear.

    Ron Paul. Only reason Ive ever registered as a GoPer in my life.

  51. “Ron Paul”

    And the fact that he was hooted by the GOP debate attendees should tell you all.

    And insulted by a cross-dresser GOP favorite no less.

  52. Cato has long advocated killing off the charitable tax deduction provisions.

    As part of a wholesale revision of the tax code, I suspect.

    Flat tax, baby!

  53. It wasn’t until Baby Bush and the fundie takeover of the GOP that the party went batshit crazy.

    That was the day the republicans joined the Democrats up in the belfry.

    If you supported TARP or much of what occurred in the Bush Administration, you can’t be taken seriously when you claim to be a moderate. If you supported Porkulus, ditto.

  54. MNG,

    Why are you sticking with the topic and not talking about Gaza? Have you been paid off by the Zionists or something?

  55. “Porkulus” = dittohead verbage.

    You can’t be taken seriously listening to a drug-addled con man.

  56. I had a guy who worked on the Obama campaign try to convince me that progressive taxation was okay because charitable contributions were 100% deductible–so your income taxes could go to a charity instead of the government. “Freedom of choice” as it were.

    Oops, I guess that argument goes out the window.

  57. No, the real joke would be to call it a ‘stimulus package’, but if it helps you sleep at night to dismiss everyone who disagrees with you as a Limbaugh supporter by all means go fall in to a deep coma and never wake up, fuckhead.

  58. What it would do is it would equalize-when I give $100, I’d get the same amount of deduction as when…a bus driver who’s making $50,000 a year, or $40,000 a year, gives that same $100. Right now, he gets 28 percent; he gets to write off 28 percent. I get to write off 39 percent. I don’t think that’s fair.

    Good God that man is numerically stupid! Next he’ll be telling us that two plus two rounds up to five and increased spending will reduce the national debt.

  59. Twas a poor choice of words, alan.

    “Porkulus” is a Limbaugh code word. The use of it makes you look like a slimy, tawdry piece of shit – like, well, the originator of the word!

  60. ACT 1
    SCENE 1

    A stark dressing room in the underbelly of the White House, bathed in the dim yellow light of a 25-watt compact fluorescent bulb. The dingy walls are plastered with Shepard Fairey “HOPE” posters. Off stage is heard the cringing, muffled gasps of a stunned arena audience. Suddenly the door bursts open and enters BARACK “BAM BAM” OBAMA, former champion, unconscious on a stretcher carried by his handlers – cut man TWINKLETOES EMANUEL, manager PAPPY AXELROD, SPITBUCKET BEGALA and SPINDOC GREENBURG. His nose is bleeding profusely, his eyes nearly swollen shut, and his forehead is embossed with a reverse “BRUNSWICK” from an errant bowling ball. They are trailed into the room by a pack of concerned sportswriters as they place the stretcher on a stark table.

    TWINKLETOES EMANUEL: Alright, alright! Give ’em some air, you mugs!

    PAPPY AXELROD: Can you hear me, Champ?

    BAM BAM: We would save enough money? uhh? we would? money save? the ones we are looking for?

    PAPPY AXELROD (gently slapping Bam Bam’s face): Champ, Champ! Look at me! How many teleprompters am I holding up?

    BAM BAM (giggling): Special Olympics? Heckuva job Timmy?

    Continued @

    http://bighollywood.breitbart.com/dburge/2009/03/25/requiem-for-a-lightweight-with-apologies-to-rod-serling/#more-88438

  61. What it would do is it would equalize-when I give $100, I’d get the same amount of deduction as when…a bus driver who’s making $50,000 a year, or $40,000 a year, gives that same $100. Right now, he gets 28 percent; he gets to write off 28 percent. I get to write off 39 percent. I don’t think that’s fair.

    What a bunch of fucking morons.

    You both get to “write off” (deduct) 100% of your charitable contributions.

    That deduction is worth more to the rich guy in terms of reduced taxes only because he is paying taxes at a higher rate.

    Sadly, I have absolutely zero doubt that 90% of Americans are sitting around right now, nodding their heads “Yeah, it ain’t fair!”.

  62. Your reaction to the word is silly, at best. Porkulus is an apt pun for the abomination. Rush didn’t invent the term, and whether or not he uses it, is beside the point. Whether you are free or not to use it within your benighted circles is not my problem, but if you plan to stick around here, to quote joe, ‘deal.’

  63. In other words, you are not the gate keeper in Libertaria, but a tolerated guest (and, given I don’t own the site, so am I), so don’t even try playing that role.

  64. And of course, the AMT adds another layer of complexity to the actual effect of the Obama proposal.

  65. and anyway real libertarians don’t believe in the 16th amendment amirite?

  66. Yes you get to deduct 100% of the amount of your deduction (very generally – there are limits, but it gets complicated), but what ultimately matters is what that deduction actually is WORTH to the taxpayer who takes it – i.e., the “tax benefit”. You might deduct that $100 gift from your taxable income, but that doesn’t mean it’s worth $100 to you. It’s worth only the amount of tax you saved that you otherwise would have paid on that $100 of income. At a marginal rate of 28%, it’s worth the $28 you would have paid in tax on that $100 of income.

    We want to focus on what O and O “literally” said and whether it was “literally” true? Yeah, that’s a standard lawyer’s trick (as I well know). But let’s go ahead and look at the actual words used.

    Obama’s exact statement, if the article above is an accurate quote, was

    “It just means, if you give $100 and you’re in this tax bracket, at a certain point, instead of being able to write off 36 percent or 39 percent, you’re writing off 28 percent.”

    Looks like he’s saying that the tax savings is 28%. He’s saying you can deduct 28%, but I think he’s just being slightly sloppy and using shorthand to say that your deduction will be worth 28%, just like it was under Reagan. Which, as the article above points out, is not true. The deduction would be worth decidedly less than it was under Reagan because of other features of the tax plan.

    Peter Orszag went one further and – again if the quote is accurate – said: “That is the same tax benefit that they would have enjoyed at the end of the Reagan Administration.”

    Orszag actually stated the TAX BENEFIT – i.e., what the deduction actually is worth to the taxpayer – is the SAME as what it would have been at the end of the Reagan Administration. Which also clearly is not true.

    They’re trying to assuage the concerns of the right side of the aisle, by misrepresentation.

  67. “Why not just assume that what Obama says is how he actually feels, that it is unfair for the wealthy person to be able to deduct more from his givings?”-MNG

    Obama is then turning the definition of “unfair” on its head. As RC Dean has pointed out, giving $100 to charity has always meant that 100% of the tax liability on that $100 given is wiped out. Obama wishes to change it so that, for only the highest tax bracket, only 71.8% of the tax liability on that $100 is removed. What Obama proposes is not merely unfair, it is unjust, and will have bad practical consequences. He is trying to justify it by playing semantic games which obscure the meaning of what he trying to do. This proposal is indenfensible on its merits, and an Obama who genuinely believes that his proposal is “fair” is frightening, as it indicates mental derangement on the President’s part.

  68. I do not even have enough deductions to itemize and I know that R C Dean, and others, are right and the Obama parrots are wrong.

    Is my having missed out on the Carter years bringing on this curse of America?

  69. the whole idea of making charity deductible is to encourage more of it. It stands to reason, then, that making it less deductible will discourage it at least a little. At the margin, making philanthropy more expensive is bound to result in less philanthropy

    I think that’s the major point of the post. In this economic environment, charities are going to have a worse time raising money anyway. Add this friction to rich folks’ contributions is going to make things a lot harder for an already challenged non-profit sector.

    MNG, Progressive and joe aka TofuSushi: How can you not see this tax-code change as anti-charity?

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