Limiting itemized deductions for the rich will hurt soup kitchens?

PolitiFact’s Lou Jacobson recently pointed me to a blog post by House Majority Leader Eric Cantor complaining that President Obama’s proposal to limit itemized deductions would hurt soup kitchens—and their poor clients—by inducing rich people to give less to charities. That may be true, but Cantor’s own ideas about cutting taxes would do the same thing.

The federal income tax deduction for charitable contributions encourages taxpayers to donate to charities by reducing the after-tax cost of giving. If you’re in the 35- percent top tax bracket, for example, giving a dollar costs you only 65 cents because the deduction saves you 35 cents in taxes. The higher your tax rate, the lower your after-tax cost of giving.

Cantor complained about the president’s proposal to limit the value of the deduction for charitable deductions (and other deductions and some exclusions) to 28 percent. That would raise the cost of giving a dollar to 72 cents because the proposal would cut the tax savings to 28 cents. The higher price of giving would likely induce people to give less (at least in total—we don’t know whether they’d cut their donations to soup kitchens).

But that logic extends to other proposals to change tax rates. By Cantor’s own logic, tax policies that he supports could also harm soup kitchens by reducing donations. Cutting the top tax rate to 25 percent, for example, would raise the cost of giving to 75 cents per dollar, leading high-income donors to give less. (That reduction would be partly offset by what economists call the “income effect”—lower taxes raise after-tax incomes, so people give more because they have more to give. But the “price effect” from raising the cost typically outweighs the income effect.)

Another example: Allowing the 2001-03 tax cuts to expire for high-income taxpayers, which the president has repeatedly proposed and which Cantor opposes, could help charities. Boosting the top tax rate to 39.6 percent would lower the cost of giving and increase contributions. (Again, an income effect would offset at least some of the gain—higher taxes reduce after-tax income so people give less.)

In any case, it’s not soup kitchens that should worry about lower donations from the rich. More than 60 percent of donations in 2005 for basic needs came from people with income under $200,000, according to a 2007 study by the Center on Philanthropy at Indiana University. In contrast, more than 80 percent of contributions to health organizations and more than 90 percent of those for education and the arts were from people making more than $200,000. Those groups have a lot more to fear from reduced tax savings for donations.

Maybe it’s silly to complain that cutting tax rates would hurt charities by leading people to give less. But Cantor’s complaint that the president’s plan would go after soup kitchens in perilous economic times is equally silly. Both arguments are true, but both ignore larger points.

But then what would you expect here in Washington where silly political arguments are always in season.