Tax Hikes on Rich May Increase Charitable Giving

Higher taxes mean less charity right?

That's been the conventional wisdom around the "fiscal cliff" deal . And it's echoed in many of my recent conversations with the wealthy. When I ask millionaires and billionaires what they will cut to make up for the higher taxes, virtually all of them say charity first, followed by discretionary investments. Lifestyle spending always comes last.

As Ari Fleischer — Bush's former press secretary — wrote in The Wall Street Journal: "This deal limits my deductions so I, and many others, will likely donate less in 2013."

Aside from the income-tax hike, the limits on deductions (known as "Pease limitations" after the congressman who helped create them) is also expected to hurt charities.

But one study says that the cliff deal will not, in fact, reduce the giving of the wealthy. It's likely to increase it.

The study, from the nonpartisan Tax Policy Center and the Urban Institute Center on Nonprofits and Philanthropy, found that the cliff deal is likely to increase giving by $3.3 billion relative to the 2012 law.

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The reason is the higher marginal tax rate. Because the top tax rate is going up to 39.6 percent from 36 percent on households earning more than $450,000, those households can now deduct their charitable contributions at a higher rate.

In other words, the top earners can now reduce their tax liability by 39.6 cents for every dollar donated — rather than the 35 cents under the old rate. This results in a "7 percent decrease in the after-tax cost of giving for taxpayers in that tax bracket," according to the report.

The capital gains hike also helps. Gifts of stock, real-estate and other appreciated property will also get a boost from higher rates, since the rate for cap gains went to 20 percent from 15 percent.

But what about Pease? The Pease limitation reduces itemized deductions by 3 percent of the amount by which AGI exceeds the above thresholds, but not more than 80 percent of the total.

It sounds bad for charity. But the report says that it will have "negligible effects on the tax incentive for charitable giving" because of the higher tax rates.

Put another way, the wealthy have benefitted once again from the cliff deal. While the focus of the public debate before the cliff was the degree to which deductions would be cut for the wealthy, their charitable deduction actually became more generous.

Whether that more generous tax system results in more giving remains to be seen, of course.