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Policy Brief: Proposed Tax Plan by the White House

Publication date: 
Monday, October 9, 2017

The White House has proposed an outline for tax policy changes, entitled “Unified Framework for Fixing Our Broken Tax Code.”  

The proposed tax plan would affect individual income tax rates and corporate tax rates. This memorandum will focus on the proposed changes to the tax code that would have a direct impact to philanthropy, and follows up on an analysis by Southern California Grantmakers in May.

The plan outlines tax policy changes that have the potential to affect philanthropy. The most relevant tax proposals that would affect philanthropy as a sector includes:

  • Increasing the standard deduction
  • Repeal of the Estate Tax
  • End itemized deductions (except mortgage interest and charitable contributions)

 

The President’s proposal sets forth the White House’s position on tax cuts and endeavors to begin tax policy changes with Congressional leaders. This policy brief summarizes the items that have the most effect on philanthropy. Specifically, the above tax policy changes would decrease charitable giving to nonprofits (resulting in a higher demand for support from philanthropic organizations), affect contributions to community and operating foundations, and potentially hinder the creation of new philanthropic institutions.

 

OVERVIEW OF THE TAX PROPOSAL

Individual Tax Rates

Under the plan, tax rates would be simplified into three marginal tax rates, the standard deduction would nearly double, all personal exemptions for taxpayers and dependents repealed, and most itemized deductions (other than those for mortgage interest and charitable contributions) repealed, including the state and local tax (SALT) deduction, which significantly impacts high-income tax states like California.

Changes to the Marginal Tax Rate

The president proposes to simplify the seven individual income marginal tax rates into three marginal tax rates, similar to a plan released by Speaker Paul Ryan last year. While the president does not specify the income levels for the three tax rates, the Speaker’s plan offers insights. Below is a table that highlights the current tax rates and the proposed rates. Additionally, this tax cut plan would eliminate the alternative minimum tax. Table 1 lays out the current and proposed marginal tax rates.

A marginal tax rate system means that the tax rate changes on each additional dollar earned. A person’s income is bracketed into each of the ranges above, and taxed at that rate within each range. Table 2 and Table 3 highlight how the proposed tax rate changes would affect a single filer earning $100,000 in taxable income, holding all other variables constant (such as the effect of changing the standard deduction or any potential changes in itemized deductions). Table 2 shows the effect of the current marginal tax rate on a single filer earning $100,000 in taxable income.

In contrast, under the proposed plan, the $100,000 filer would be in two of the three tax brackets under the more simplified system. Table 3 shows the effect of the president’s proposed marginal tax rate on $100,000 of taxable income.

In the scenario above, a person earning $100,000 in taxable income would pay $915.25 less in taxes, or a 4.4 percent decrease in taxes paid. Note that this change in percentage extends only to this particular example and will vary depending on taxable income. According to the Tax Policy Center, the increase in after-tax income would range between 0.5 to 1.2 percent of taxpayers in the bottom 95 percent of the income distribution. The Center notes that taxpayers with incomes above $730,000 (the highest 1 percent of earners) would receive a net positive of 8.5 percent in in their after-tax income, making up 50 percent of the total tax benefit available to all taxpayers.

SALT Deduction Elimination Affect Education

Currently, SALT allows  individuals to subtract from their federally taxable income some or all of the amounts they paid for state and local taxes on real estate property, income, personal property (mostly vehicles), and sales (in some states that do not levy income taxes). This provision offers an incentive, in the form of lower federal taxes, for individuals to engage in activities that benefit education and the larger society. For example, taxpayers may be more inclined to save for their children's college education, continue their own education, or pay state and local taxes for education and other public services if they know these investments or payments will be offset to some extent by a federal tax break.

Corporate Tax Rates

The president’s plan would lower the corporate tax rate to 20 percent from 25 percent. It would also eliminate some business deductions and credits. The proposal retains the research and development credit and the low-income housing investment credit. However, the restructuring would eliminate the domestic production deduction, deduction for corporate charitable contributions, and energy investment credit. The elimination of the deduction for corporate charitable contributions amount to $35 billion over ten years. It is unclear the magnitude of how the elimination of the deduction of the corporate charitable contributions would affect corporate giving on the sector.

The above is not a comprehensive summary of the proposed changes to the corporate tax rate. If you have questions about the White House’s proposed changes to the corporate tax structure, please contact SCG’s public policy staff.

 

PROPOSALS AFFECTING PHILANTHROPY

Standard Deduction

The White House proposes to almost double the standard deduction. This is similar to Speaker Ryan’s “Better Way” plan announced last year. The chart below demonstrates the existing and proposed standard deductions under the President’s plan.


Note: This chart does not apply for people born before January 2, 1952 or a person with visual impairments.

The standard deduction establishes a base amount of income that is not subject to tax, and reduces a taxpayers adjusted gross income (AGI) that is used to determine the income subject to tax. Doubling the standard deduction means doubling the base amount of income that is exempt from federal income tax. Most taxpayers choose the standard deduction because it is larger than the deductions they can itemize. Others choose that option because it is easier than identifying and totaling the expenses they could itemize or because they do not realize that itemizing would reduce their tax liability.

Effect on Charitable Giving: Nearly doubling the standard deduction affects the tax incentive for making charitable gifts for 95 percent of taxpayers. According to the Tax Foundation, in the 2013 tax year, 30.1 percent (44 million) of households utilized itemized deductions. With a higher deduction, it is likely that people would claim the higher standard deduction rather than separately itemizing things like mortgage interest payments and charitable gifts. Currently, charitable contribution and miscellaneous deductions averaged about $4,800 each, or about 17 percent of total itemized deductions.

According to a 2013 study by the Johnson Center for Philanthropy at Grand Valley State University, residents in Michigan gave less following a repeal of a state tax credit for donations to community foundations. Giving of $400 or under to community foundations decreased by an average of 27.2 percent. However, the report made clear that the decrease in giving, while strongly correlated with the elimination of the tax credit elimination, did not specify a causal link.

Estate Tax

The estate tax is a tax on cash, real estate, stock, or other assets transferred from a deceased person to their heirs. The federal estate tax is due only to the portion that exceeds approximately $5.5 million per person ($11 million per couple). The average tax rate paid by those affected by the estate tax is approximately 17 percent. However, as with income tax, these marginal rates differ depending on the amount in excess of $5.5 million. The estate tax affects approximately 0.2 percent of taxpayers. 

Effect on Charitable Giving: The Congressional Budget Office studied the effects on charitable giving in a 2004 study when Congress contemplated a repeal of the estate tax. Because repealing the estate tax reduces the incentive to contribute for all decedents who would have faced it, a repeal of the estate tax would have induced a decrease in charitable bequests of 16 percent to 28 percent.

Charitable Contributions Preserved

The White House preserves the deductions for charitable contributions. However, the two aforementioned proposals would affect the tax incentive for the charitable contribution. In other words, while the charitable contributions deduction is preserved, it is likely that the majority of taxpayers will opt for the larger standard deduction.

Consequently, charitable infrastructure organizations are calling for “an above-the-line” deduction. An above-the-line deduction is a direct adjustment to a person’s AGI. The “line” refers to AGI, and if a deduction is “above-the-line”, it has a direct offset to the income reported. All taxpayers can claim “above-the-line” deductions regardless if of whether a person takes standardized or itemized deductions. This would create a tax incentive for all persons, regardless of whether they itemize or take the standard deduction, to increase their charitable giving.

In contrast, “below-the-line” deductions occur after the AGI calculation occurs. Below-the-line deductions are itemized deductions. Currently, charitable contributions are “below-the-line” deductions in addition to home mortgage interest, state and local taxes, and medical expenses exceeding 10 percent of AGI (among several others). Consequently, only those persons itemizing their deductions can claim the charitable deduction.

Effect on Charitable Giving: Because above-the-line deductions affect all taxpayers, a policy that changes charitable deductions from below-the-line to above-the-line would allow all taxpayers to take the deduction of the contribution, serving as a tax incentive to make charitable contribution. Consequently, the tax code would provide an incentive for those taking a standard deduction to make charitable contributions so that those charitable contributions could be deducted.

Contact

If you have questions or comments, please feel free to contact Seyron Foo, Director of Public Policy and Government Relations, at [email protected] or (213) 680-8866 ext. 221.

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