Commentary: Arguments for and against a cap on tax-deductible donations

Issue Guide posted on Philanthropy New York's website

The Obama Administration has proposed a percentage cap or maximum tax rate against which all itemized deductions may be deducted, folding charitable giving into the mix. While some tax experts and researchers report that a cap will have only a moderate effect on giving, many leaders in the nonprofit sector insist that a cap will significantly diminish contributions. At a basic level, the debate over the charitable deduction can be boiled down to two questions:

1. Is it fair that a person in an upper income bracket (paying at a 39.6% rate) making a $100 donation to charity could receive up to a $39.60 income tax reduction for that donation when a middle income earner (paying at a 28% rate) would only see a $28 reduction in taxes on that same $100 donation?

2. If the rate of deduction were capped at 28% so that, for example, a donation of $1 million would result in an income tax deduction of only $280,000 instead of $396,000, would high-income earners reduce their charitable giving?

Capping the charitable deduction at 28% is the most hotly debated potential reform in this area, but there are other reforms that policy makers are considering that could also raise revenue while leaving nonprofit donations unaffected, or even increasing them. [Click here to view arguments for and against capping the charitable deduction, as well some alternative perspectives.]

Commentary: A tax credit, not a deduction, might be most equitable idea

Bruce Bartlett, The New York Times' Economix blog, 8/20/13

The deduction for charitable contributions is among the oldest and most popular in the [US] tax code. According to the Treasury, it reduces federal revenues by $54 billion, making it the fifth-largest tax expenditure. The charitable deduction was added to the tax code in 1917, when taxes were sharply raised to pay for World War I. Although there was wide popular support for giving charitable contributions a tax break, there were [concerns] the wealthy would come to control the nonprofit world as they already controlled the profit-making world. This is still a problem today. The vast bulk of charitable gifts come from those making more than $200,000 a year. [And] those with moderate incomes are far more likely to contribute to religious organizations, while the wealthy [are more likely to give to] education, health and the arts. Not surprisingly, charitable groups have been lobbying against any curtailment of their deduction for some time. Scholars are divided. Richard Thaler of University of Chicago has said it needs to be rethought. He notes the unfairness of giving a large tax reward to the wealthy while giving nothing to those with modest incomes. Robert J. Shiller of Yale says we shouldn't undermine the generosity of Americans, who give far more to charity than citizens of any other country. He suggests expanding the deduction by making it available to those who don't have enough deductions to be able to itemize. One obvious compromise would be to convert the charitable deduction to a tax credit: some percentage of contributions could be subtracted directly from one's tax liability rather than from taxable income. This would equalize the tax reward across incomes and could be done in a way that raised net revenue to pay for rate reductions. 

To avoid taxes, the rich empty Swiss banks and buy/warehouse billions in art

Commentary: What makes an artist a "professional" for tax purposes? 

Thousands of dollars in taxes can often ride on a single question: is the artist a professional or an amateur? At first glance, it might seem like an easy question -- but there are some surprising twists in state and IRS rules on tax deductions. Consider the case of Venus de Mars. Minnesota Public Radio recently told the story of a tax audit that resulted in a bill for thousands of dollars in back taxes for [this] performance artist. de Mars doesn't have a day job, and earns about $20,000 a year entirely from music, painting and other artistic endeavors. Some years, she earns more than she deducts in expenses -- and sometimes, she doesn't, resulting in what she thought were tax deductible losses. de Mars had filed state tax returns since the 1990's, each one prepared by an accountant and claiming deductions related to her art and music projects. In 2012, after the completion of a state audit, the state determined de Mars was not a professional artist, and disallowed all of her deductions for the three years covered by the audit. The state's main reason was the department's determination that de Mars enjoyed her work too much, and didn't work hard enough to make a profit. The IRS fact sheet on determining whether costs incurred by artists are deductible or not poses these questions:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?

Detroit Institute of Arts could lose millions in regional tax funds if it sells its art

Randy Kennedy, The New York Times, 8/21/13

Battle lines are being drawn over the fate of the Detroit Institute of Arts, whose encyclopedic collection of art has become a target of creditors seeking billions from Detroit in the city's bankruptcy proceedings. On Tuesday, officials in Oakland County -- one of three Michigan counties that agreed last year to institute a property tax increase to save the Detroit Institute from devastating budget cuts -- unanimously approved a resolution warning that any attempt to use the museum's collection or budget to raise money for the city's creditors would "terminate any obligation" of the county to continue to provide support. The Oakland County Art Institute Authority, created to oversee that county's role in the tax, said in the resolution that it "continues to believe that the museum and its collections are important, irreplaceable and indivisible parts of the cultural fiber of the state and region." Together, the three counties expected to raise about $250 million over a 10-year period to support the museum's operations and acquisitions. L. Brooks Patterson, Oakland county's executive, praised the decision to oppose any use of art as an asset, calling it "a shot heard around the world that we support keeping the D.I.A.'s world-class art collection intact."