Obama's Tax Plan Will Hurt Nonprofits

A 28% cap on deductions would reduce giving at a time when charities already are reeling

Americans have a unique commitment to philanthropy. Our culture emphasizes giving, and our citizens respond: Some 83% of all charitable donations in the U.S. come from individuals, according to Giving USA Foundation. In 2007 (the latest year for which figures are available) that meant 83% of more than $306 billion.

Now, amid the widespread destruction of wealth that has accompanied the current economic crisis—and with more economic challenges to come—it's more important than ever to support education, health care, art, culture, and efforts to alleviate poverty. Together they provide a vital outlet for those looking to make a difference in someone else's life. They also help create the sort of society we all want to live in: one with healthy, schooled citizens and workers.

How to rally the citizenry to lend a hand? Given his popularity, the best thing we have going for us is President Barack Obama. (I believe if there had been an election for President of the world in November, he would have been victorious by multiples of his winning margin in the U.S. election.) I enthusiastically embrace his plan—the only viable plan we have—to get the country back on track.

Still, I'd like to add my voice to those in Congress who worry that the proposed philanthropic tax deductions in Obama's budget will bring a decline in gifts to charities.

Under Obama's fiscal blueprint, families making more than $250,000 will be able to claim only 28% of their charitable giving as a tax deduction starting in 2011. At the same time, the ordinary income tax rate for such families will be raised to 39.6%. (Currently, the top ordinary income tax rate, 35%, is reserved for families making more than $357,700. For these households, charitable deductions are capped at 35%.)

The new 39.6% income tax rate for families making more than a quarter-million dollars should not cause alarm: It is imperative, after all, that we make a down payment on health-care reform and begin reducing the deficit, as the Administration suggests. Let's not forget, too, that those in the upper brackets enjoyed many years of economic prosperity at this same 39.6% tax rate during President Bill Clinton's time in office.

But capping charitable deductions at 28% is cause for great concern when it comes to our country's not-for-profit organizations, which already have been harmed by the economy's free fall. The Center on Philanthropy at Indiana University studied what would have happened to charitable giving in 2006 (the last year for which we have itemized data) had these proposals to limit deductions and raise rates been in effect for households with incomes above $250,000 a year. The researchers found it would have reduced giving by those households by nearly 5%, or $3.87 billion.

So here's my proposal: Why not raise the proposed top ordinary income tax rate by one percentage point, to 40.6%, and at the same time lift the cap on charitable deductions to 40.6%? The increase in the top tax rate could make up for the decrease in tax revenues resulting from the bigger deduction for charitable giving. It's win-win for all sides—the government, individuals, not-for-profits, and certainly our local communities.

Such a move would send a powerful signal, one that would encourage people to donate to the causes that move them, to give back to society at a crucial time in our country's history. A period of change, and that includes hard times, can create such opportunities.

Decades ago, virtuoso violinist Isaac Stern, who helped save Carnegie Hall, instructed me in the importance of philanthropy, of giving back. He led by example, in the belief that music and the arts were a way to help bridge cultural divides. All of us owe it to the likes of Isaac Stern, Andrew Carnegie, David Rockefeller, and Bill and Melinda Gates to continue building the nation's philanthropic foundations. It's our duty to uphold this tradition—one that helps define us as Americans.

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