Let’s Prevent The Government From Hurting The Poor Even More

There’s a tremendous battle in Congress regarding balancing the budget.  The Democrats want to raise taxes and remove deductions for the highest income earners while the Republicans want to just cut spending without raising taxes on the richest Americans.  There has to be a combination of higher taxes and lower spending in order for there to be an agreement, otherwise the US economy will fall back into a recession since nobody will have any confidence to spend.

Given it’s the holiday season, one of the most perplexing issues is why the President and his party wants to remove charitable deductions for those in the highest two income tax brackets: 33% ($212-$380,000) and 35% ($380,000+).  There’s no doubt that the main reason why people give is to help people, however, the elasticity of giving is not vertical mind you.  There will be incremental negative consequences.

It’s estimated that roughly $300 billion of charitable contributions happen each year, with the large majority of donations coming from the wealthiest citizens.  The top 10% of income earners pay 70% of all taxes, despite earning 46% of all income.  The statistics for contributions are roughly the same for charity.

With the enactment of asymmetric policy against high income earners, some have estimated there will be a decline of roughly 2%, or $6 billion in charitable contributions per year.  2% sounds quite conservative, but regardless of the amount, there will be a decline in charity exactly during a time when charities need the money the most!

The poor have already suffered enough, let’s not make them suffer even more.  With the economy growing at an inadequate pace to soak up the ever increasing number of unemployed, we will see an increase in those falling under the poverty line.  More people needing assistance increases the financial burden on the government and a negative cycle ensues.

What the government needs to do is incentivize people to give even more, not less.  Individuals are much more efficient at identifying causes that need the most help, not big organizations.  I urge everyone to write, call, and speak up for the poor by denouncing the removal of charitable deductions for those who donate the most.

We should fight for the less fortunate always, and not just during the holidays.  Give what you can give to what you believe in.  We never know when we’ll need help, so until that day arrives, we fight for them.

Happy Holidays,

Sam

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Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    I’m becoming more convinced that Big Government is insane. Corzine of MF Global still walks free, while little raw milk producers and CSAs are getting raided at gunpoint and taken away in handcuffs. This latest battle over charitable deductions is more proof for the pudding.

    • says

      As an ex Senator (D) from New Jersey, and a very rich man, it’s hard for the government to take down Corzine. The people have elected Big Government and they want more of it. Why? Because politicians are skillfully able to convince their voters of a better life, whether that’s true or not.

  2. says

    This and the inability of Congress to compromise confounds me. The recent 60 minutes segment showing how members of Congress can profit from inside information just adds to it. Is this how the rich is different from you and me? They get to use inside information, but we don’t! Members of Congress start out rich, but become much richer while serving in Congress.

    • says

      This is a concern for me as well KC. Why do we just accept that our elected officials get to act this way? When did they become above the law. The biggest concern for me is that this just encourages the type of cozying up between politicians and investment banks that we have seen in the past, and live in fear of. A major distortion on the markets, and an rigged game.

      • says

        I think they feel too powerful and above the law. They create legislation that becomes law is intoxicating. Their power comes from getting away with it. Right now, they are hiding behind a “blind trust”, but the the person running it is aware of what the legislators are doing and probably speak to them. Maybe they should be barred from buying or selling any stock that they are writing legislation. i.e., if healthcare, no healthcare stock.

  3. says

    I saw some stats on the news the other night that the approval rating for congress is lower than that some of the biggest terrorists like bin Laden, and lower than Nixon at the height of Watergate. The protestors really should move their tents and start Occupy Congress! Removing charitable contributions from the highest income brackets is going to hurt so many charitable organizations. I’m sure wealthy individuals will continue to donate but they’re going to donate a lot less without the tax benefits.

    • says

      I saw that news segment too and was laughing! It’s nuts! Also, I don’t think there will just be a 2% incremental loss. Maybe 5% or 10%, which would be $15-30billion NET LOSS to charities if Congress passes this discriminatory rule. If they want to change the rules, then get rid of deductions for all, so there won’t be a backlash.

  4. says

    The only big government I could possibly accept was one run by a perfect AI that could somehow set just the right incentives to maximize everyone’s happiness in a real, not fake way. ;)

    Barring movie fairy tales like this, so long as we have to rely on humans, I’d rather not give one group too much power. Should anyone really be surprised when they use that power to enrich themselves and their buddies, all whilst using whatever populist slogans happen to be popular at the time?

    I can’t quite see a replacement to democratic law & order and constitutional rights at the moment, and I think we’re certainly better off having a basic amount of services even if it does require some taxation as opposed to anarchy, (but I say, let’s try out different systems by encouraging competition between governments and different levels of government, just like we have entrepreneurship in the private sector) but I think that much of the government above that is an embodiment of the worst of human emotions, such as jealousy, greed, anger, and fear. Politicians are masters at rousing these emotions within us, unfortunately, but maybe, just maybe, people are becoming more well informed? Now they can go on the web, see a post like this on a site like this, and perhaps think a bit more broadly.

    All in all, giving to charity is a much more decent act than demanding someone else hand over money to support your causes.

    • says

      Now that would be interested wouldn’t it? The Perfect AI…. that has to be created by the perfect man though.

      We should NEVER be surprised with government motives, which is why would should ALWAYS only forecast relying on ourselves.

      I wonder often, who are the people voting for these politicians and keeping them in power. Have they been BRAINWASHED? Do they choose to ignore all the filth eg insider trading?

  5. says

    Timely topic. It is very irresponsible to remove the tax incentives for charitable donations. This class warfare business needs to stop. It’s the very reason why we’ve been at such standstill, and fact the that the seemingly most efficient vehicles to helping the poor will be a casualty of political rhetoric and ill-conceived policy is just sickening.

  6. says

    Though I’m not against supporting charities, I believe that encouraging it, or anything, with tax deductions is an inappropriate behavior for our (or any) government.

    A flat tax rate would eliminate some of the government manipulation of our actions and I think it would be a fairer way to tax.

    • says

      A flat tax takes AWAY the power of government. It will never happen unfortunately not the least b/c no Republican will win in 2012, b/c they are not good enough at manipulating the swing voter.

      Why exactly would encouraging charity through tax deductions be bad?

  7. Patrick says

    What really bothers me is how the majority of American’s seem to have blinders on and don’t realize what is going on around the world in places like Greece, Egypt, Syria, Iran, and Italy just to name a few. Does anyone care to guess how many civilians have been killed for protesting in Egypt and Syria in the last year? I don’t know how most of you were raised, but the taking of life is a more serious offense than taking money. A sin is a sin is a sin, but still, on the grander scale I am more concerned about governments turning guns on their citizens than members of Congress making unethical monetary gains from insider trading.

    While I believe in donating to charity, I only donate locally. Some of the largest “charity” organizations rank only behind the U.S. Congress in terrible spending habits and budgeting. The CEO of the United Way has a yearly salary of almost $1 million, do you realize how many donations have to be taken in just to pay his salary? Your $10 donation might make you feel better, but odds are that at least 15% is going towards operating the organization.

    The entire tax code needs redone, the problem is no one currently in office is qualified or capable of producing a document that is not tainted and filled with loopholes. I hope we continue to have debates and elections in the U.S. and not follow the Europe model which isn’t working so well right now.

    • says

      The stories just don’t get the same attention in the United States. Here’s a great example of hiding the big events from an American audience: http://www.time.com/time/magazine

      I agree with you 100% on the tax code. The problem is that voters have no understanding of how the tax code works, and both parties appeal to that lack of understanding. Republicans say that removing a tax benefit for a particular industry is a “tax hike,” while Democrats rally around the idea that the world was better when the top marginal tax bracket was as high as 90%.

      Both parties are intellectually bankrupt.

  8. says

    I couldn’t agree more. Sort of off topic, however, relevant I believe. I heard that there were some policies in place that were trying to compel citizens to serve in certain capacities. I can’t remember anything more specifically than that. I just think that’s terrible policy. You can’t FORCE people to be humane or decent people. BUT, you can inspire and provide incentives. Incentives lead to results as we’ve seen time and time again. Inspiring people to be better and give more is our insurance that those less fortunate than us will get what they need.

  9. says

    I find it odd that those in the government attacking the rich are very well-off themselves. I wonder if somehow they think that they are special and don’t realize that they are that top percent of income earners.

    You’d think that they would realize that some of the policies that they are spinning might have unpredictable side-effects… It seems like they only look forward one move instead of five moves like I think they should.

    Why did we elect them again?

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