A high-level committee that offered a plan for reducing the federal government's debt today issued a proposal that would radically change the way the tax code treats charitable gifts.
The proposal would essentially eliminate the charitable tax deduction.
In its place, all donations made by federal taxpayers would qualify for a 15-percent tax credit. But instead of that credit going to the taxpayer, it would be given to the charity receiving the donation in the form of a matching grant from the Internal Revenue Service.
That setup would mean that when a donor wanted to give $100 to a nonprofit group, he or she could actually contribute $85. The government would cover the other $15, according to the proposal.
The plan, which was drafted by a 19-member committee of prominent Democrats and Republicans, called the way itemized deductions are currently structured—including those for charitable gifts—"perverse" because they give the biggest subsidies to high-income taxpayers.
The proposal, one of a wide range of recommendations on taxes and spending, aims to give all taxpayers the same benefits while reducing the size of the federal deficit.
"Restructuring the charitable deduction will greatly increase the number of taxpayers who receive a subsidy for charitable donations but will reduce the subsidy rate for upper-middle-income and upper-income taxpayers who itemize," the report said.
The plan, issued ahead of recommendations that are due by December 1 from a separate deficit commission set up by President Obama, was offered by a committee set up by the nonprofit Bipartisan Policy Center, which aims to be an "incubator" for public-policy efforts. That committee is headed by Pete V. Domenici, the Republican former chairman of the Senate Budget Committee, and Alice Rivlin, the Democratic former head of the Office of Management and Budget.
The committee also suggests creating just two individual income-tax rates—15 percent and 27 percent—to replace the current six rates that go up to 35 percent.
Currently, only taxpayers who have enough qualified expenses to itemize their charitable contributions can get the tax break, and those in higher tax brackets can write off a bigger percentage of their income than those in lower brackets.
The report says its proposal could broaden the pool of people who donate to charity but also change the composition of giving. "Charities favored by lower-income people (disproportionately religious organizations and organizations providing services for the poor) may benefit," it says.
Leonard E. Burman, a committee member who helped draft the recommendation, said he got the idea for a tax credit that would go directly to charities from a system used in Britain called "Gift Aid." That allows organizations to reclaim from tax authorities the amount people have paid in taxes on the money they donate.
Mr. Burman, a professor of public affairs at Syracuse University, said he envisages that charities could advertise to potential donors that the IRS will add value to their contribution, the way public radio advertises "matching gifts" when it asks listeners to donate.
He said it is not clear whether the proposed system would increase overall contributions. It could, in fact, decrease giving to organizations that rely heavily on major donors, like universities and opera companies, since high-income givers will lose the most in tax breaks, he said.
But he said the committee -- which also proposed replacing the mortgage-interest deduction with a tax credit that would go to lenders and be passed down to borrowers in the form of lower interest payments -- was looking for ideas that would provide equal subsidies to all taxpayers and eliminate the need for so many tax forms.
The co-chairs of President Obama's deficit-reduction commission last week proposed several less radical changes to the charitable deduction, including allowing the tax break only for contributions that exceed 2 percent of adjusted gross income. Ms. Rivlin is also on that committee.