Charitable Deduction Is a Powerful, Effective Incentive

In "Should We End the Tax Deduction for Charitable Donations?" (The Journal Report/Wealth Management, Dec. 17), the debaters each scored points on whether tax reduction serves as an incentive to giving, but did not present the most compelling reason to maintain it. The question is not the efficacy of the deduction but who pays for charity. The U.S. government has a long history of providing support for education, the arts and humanities as well as many programs for the poor. The taxpayer also supports these same programs annually with billions of dollars.

By offering a deduction for charitable giving the result is a partnership of support. For every dollar a charity receives it "costs" the donor at least 65 cents while it "costs" the government only 35 cents or less depending on the marginal rate of the donor.

If the deduction were eliminated, many people would continue to give money to charity, but I believe the amount would be less.

Charitable needs would not disappear with the charitable deduction. Charities would have to look elsewhere to make up for reduced giving. Most likely this would be the government. They and their lobbyists would apply pressure to increase the amount of money in the form of grants and in turn create demand for higher taxes to offset the increased spending.

Paul M. Thomson

Lee's Summit, Mo.

The prospect, say, of eliminating charitable deductions or mortgage deductions and keeping others holds out the prospect of creating internecine warfare in Washington among different interest groups. A fairer way to raise funds in this arena might be to limit a taxpayer's total deductions to, say, 90% of the total amounts itemized in 2013, 80% in 2014, and declining more if needed in subsequent years. This approach would spread the pain equally among all taxpayers and minimize the distractions and economic dislocations that will result if one interest group is forced to give up its cherished preferential treatment and another does not, while still allowing significant new revenues to be raised.

Thomas W. Gilliam Jr.

Charlottesville, Va.

There's no question that the charitable deduction is a powerful and effective incentive. It's about leverage. It enables people to give more than they otherwise would. Research, as well as anecdotes from thousands of charities, shows that people give because they support a cause, and that incentives such as the deduction affect the amount of a gift, especially as the size of gifts increases. In addition, for every $1 subject to the charitable deduction, communities see $3 in benefits. No other tax provision generates that kind of effective, positive community impact.

In a tough economic environment, we should be talking about expanding the deduction and reinstating the Charitable IRA Rollover—not eliminating the tax deduction—so that the efficiency of the deduction is enhanced and more people can take advantage of it.

Andrew Watt

President and CEO

Association of Fundraising Professionals

Arlington, Va.

I would be happy to forgo my charitable deduction if the government would get out of the business of charity. The compulsory charity collected from my pay each week is distributed inefficiently to targeted voting blocks. If I had access to that money, I would gladly give away much of it to charities that actually make a difference.

Chris Sobolewski

Collegeville, Pa.

Pace Warren Buffett, Taxes Affect Bottom-Line Returns

Warren Buffett's crusade for higher taxes on the rich can be argued as a matter of fairness, but as Clifford Asness points out in "Warren Buffett Knows That Tax Rates Matter" (op-ed, Dec. 17), any claim that higher taxes will not affect investment decisions is preposterous. Three of the largest holdings in Mr. Buffett's Berkshire Hathaway portfolio, for instance, are Coca Cola, IBM and Wells Fargo. Each of those companies takes advantage of numerous tax deductions and "loopholes" so that their effective tax rates are far below the statutory corporate rate of 35%. IBM trades at about $38 per share on trailing earnings per share of about $1.90 (i.e., a price-to-earnings ratio of 20). If IBM suddenly volunteered to pay a full 35% tax rate, its earnings would drop more than 10% to about $1.65 per share—and a P/E ratio of 20 then would produce a stock price of just $33, down $5 from the current level. The basic math is simple.

Mr. Buffett is a patient value investor and has shown that he can make money in all types of investment and tax environments. After income and capital gains taxes go up, stock prices will naturally adjust lower to reflect the new expectation of lower after-tax returns.

That in fact was the mid-1970s environment that Mr. Buffett cites to support higher capital-gains tax rates (39.9% in 1976-1977). But the stock market's average P/E ratio was a paltry 11 time earnings in 1976, so bargain hunters could buy stocks at a cheap enough price to still earn handsome returns in spite of higher taxes. Many of Mr. Buffett's brilliant investments were made when higher taxes or poor economic policies decimated the stock market and created attractive buying opportunities.

Mr. Buffett has shown himself to be an honorable man as well as a shrewd investor. It seems that he genuinely believes that higher taxes on wealthy Americans will do more social and economic good than harm, and reasonable people can disagree about that conclusion. But Mr. Buffett did not make billions by ignoring the effect of taxes on bottom-line returns and to suggest otherwise cheapens a rational debate and discredits the rest of his tax-increase argument.

Ryan Pierce

Norfolk, Va.

Mr. Asness asserts that fewer investments will be made if tax rates rise as Mr. Buffett recommends, and that this assertion is "unassailable" by every "investment analyst on earth." His view ignores the larger context. Investments comprise about 15%-20% of annual GDP. The other three legs of the economy are government spending (20%), foreign investment (0 to negative 5%) and consumption (65%). A fair tax policy as Mr. Buffett suggests tries to optimize investments, not penalize them, by ensuring the health of consumer spending—by far the largest leg of the economy and involving by far the middle class—and international trade. This is one reason why tax rates aren't zero. I believe Mr. Buffett's tax suggestions will actually increase investments by strengthening consumption and foreign trade. We can disagree, but Mr. Asness should know there are a few analysts on earth who agree with me.

Tom Keefe

Yorktown, Va.

Warren Buffett not only knows that tax rates matter, he also demonstrates the more fundamental point that the government does not make the best use of his dollars. If Mr. Buffett believed the government could make effective use of his money, he would presumably allow his estate to be subject to tax, which would generate several billion dollars for the government to spend. Instead, he is contributing the bulk of his estate to the Gates Foundation and will pay no tax on the assets he transfers. A tax rate of zero percent seems very strong evidence that Mr. Buffett knows not only that rates do matter, but that his money is better spent in the private sector.

John Foster

Portola Valley, Calif.

'Inalienable Right' to Nuclear Fuel

It is unfortunate that, parallel to new efforts to hold another round of talks between Iran and the Five Plus One group [the five permanent members of the U.N. Security Council plus Germany], attempts aimed at disrupting these efforts and spreading Iranophobia have gotten under way too.

The Dec. 18 op-ed "The Economic Costs of Nuclear Iran" by Charles Robb, Dennis Ross and Michael Makovsky is a case in point. The authors' mention of a "Saudi-Iran nuclear exchange" is appalling and a grotesque stretch of imagination. Iran and Saudi Arabia have normal neighborly relations, underpinned by many historic, cultural and religious affinities, and bolstered by a strong relationship between the two nations, leaving no room for such fictitious scenarios as the authors toy with.

In our view such attempts are intent of averting focus on the real threat in the region emanating from the Israelis' nuclear arsenal and their continued policy of appropriating Palestinian lands.

Such diversionary Iranophobic arguments mean to let Israel off the hook and press the wrong agenda for the U.S. government, which will only harm the U.S.'s own interests in case they are taken seriously.

Iran has always reiterated that her nuclear program is fully for peaceful purposes, and the intensive International Atomic Energy Agency (IAEA) inspections have never revealed anything to the contrary. Last week, Iran and the IAEA made substantial progress on the "structured approach" for future cooperation. The negotiations will continue in mid-January. Iran, as other members of IAEA, enjoys an "inalienable right" to possess a civilian nuclear-fuel cycle under the Non-Proliferation Treaty.

A more realistic and constructive approach by the U.S. toward the Iran-Five Plus One talks, based on U.S. national interests and Iran's efforts to establish the Middle East as a nuclear-weapon-free zone, would to work toward peace and security in the Middle East and beyond.

Alireza Miryousefi

Head of Press Office

Mission of the Islamic Republic of Iran to the U.N.

New York

Capital Gains for Smith and Jones

In regard to John Fox's Dec. 18 Letter to the Editor "Effective Tax Rates Are Really Higher Than You Think":

Perhaps Mr. Fox is correct that the top 2% derive much of their income from capital gains and dividends, but so do many retirees—people who saved all their lives and invested to create an income stream in their retirement years. Does it matter that some were successful entrepreneurs and others simply frugal? Does it matter that most of these savers and investors are not Gates and Jobs, but Smith and Jones who never saw a corner office? Does it matter that dividends and capital gains are the fruits of putting their after tax money into ventures that succeed to the point where they can actually pay them a profit? Yes, it does. So, when you see only the most visible beneficiaries of a policy, don't forget those you don't see. They count, too.

Thomas M. Michaels Jr.

Wilmington, N.C.