The country is in a severe financial bind, and the solutions are going to require action on a number of fronts, including reductions in spending, increases in taxes and likely – with any luck – a reform of the nation’s impenetrable tax code.
That last discussion – which needs to be put off until the fiscal cliff problem is resolved – is producing a number of possibilities, some of which are dangerously counterproductive.
The worst, by far, is the Obama administration’s proposal to limit the tax deduction for charitable giving by wealthy Americans.
It’s one thing to insist that the wealthy pay a larger share of enormous incomes to support the nation’s needs, but it’s another to disincentivize their giving to charitable organizations.
Donations from the wealthy are critical to the missions, and even the survival, of many charities. If their giving falls off, one of two things will happen – or maybe both: Suffering will increase as private-sector agencies are increasingly unable to meet the need for their services, or government spending will rise to meet the increasing demand, defeating the goal of a limit on charitable deductions.
It would be one thing if the nation had no other options, but there are plenty of places to look for savings, including waste within government spending, both military and nonmilitary.
Charitable groups that depend on donations are fighting the move. They include the United Way, American Red Cross and Lutheran Services in America.
Talk is also circulating once again about limiting or abolishing the deduction for home mortgage interest. There are sensible arguments in favor of that, but in the end, it would be too disruptive to a system that is woven into the fabric of the nation’s life.
It is worth noting that Canada, which does not allow interest on home mortgages to be deducted from taxes, did not suffer the housing collapse that this country did during the great recession.
The reason, some experts say, is that Canadians are not incentivized to buy more house than they can afford. More than that went into the U.S. housing collapse, of course, but it’s a relevant point.
Nevertheless, the American economy is driven to a large extent by housing. When Americans can buy houses, they also buy appliances, furniture, televisions and more. What is more, homeowners of all income brackets have based many of their financial decisions on the fact that their mortgage interest deduction reduces their taxes.
These are all issues that merit serious and skeptical review, and they should not be part of the horse-trading that is all but certain to be occurring as part of negotiations over avoiding the fiscal cliff.
Congress can agree on some package of budget cuts and tax increases on the wealthy to accomplish that goal, but reforming the tax code is not something to be done in a couple of weeks of secret bargaining. Cooler heads need to prevail.