The Obama budget proposes to raise $291 billion over ten years from limiting the benefit of deductions to families in the top tax bracket — and justifies the proposal as a response to a “disparity”:
Currently, if a middle-class family donates a dollar to its favorite charity or spends a dollar on mortgage interest, it gets a 15-cent tax deduction, but a millionaire who does the same enjoys a deduction that is more than twice as generous. By reducing this disparity and returning the high-income deduction to the same rates that were in place at the end of the Reagan Administration, we will raise $291 billion over the next decade.
John Hinderaker at Power Line calls this reasoning “Orwellian.” The “disparity” results from the fact that the “millionaire” (defined in the Obama budget as any family with income of $250,000) would pay tax at a rate nearly three times as high (39.6 percent) — and thus obviously receives a 39.6 percent benefit from a deduction. Obama proposes to return to the Reagan rates for deductions (28 percent), but not the Reagan rates for income tax (28 percent). He wants to create a disparity to reduce a disparity.
It is actually even more Orwellian than that, because the Obama proposal is not really designed to address a “disparity” but to transfer huge revenues from charities to the government. If tax rates increase by 13 percent (from 35 percent to 39.6 percent), charitable contributions would presumably increase by at least that amount, since taxpayers could donate 13 percent more at the same after-tax cost. The result would be significantly more aid for charities as taxpayers responded to the increased incentive.
By limiting the deduction to 28 percent, Obama would not only take away the incentive for increased charitable contributions, but reduce the incentive for the current level of contributions, and result in less revenue to charities and more to the government. As the pseudonymous tax lawyer Gregory V. Helvering concluded in “Obama, Charity and Fairness:”
The government needs as much money as it can get to fund its new expanded goals, and Obama has found a way to get a large chunk of it from charities — while justifying the massive transfer of funds to government as something required for “fairness” … George Orwell, call your office.
The Obama proposal affects not only charitable contributions but mortgage deductions (reducing the value of homes) and the burden of state taxes: taxpayers would have to pay their state tax liability but not receive a full deduction of that amount against their federal tax liability. The total effect is to push the nominal 39.6 rate into the mid-40s.
Obama cannot seriously believe this will pass Congress, which rejected it when he first proposed it last year. It would create a huge tax inequity, cause significant damage to charities and home values, and makes no sense. But it enables Obama to present a budget with “only” a 1.3 trillion deficit, instead of the record 1.6 trillion it would be without it. So it is not only Orwellian but also disingenuous.