One would expect an economics professor from Harvard, and a president emeritus of the National Bureau of Economic Research at that, to know whereof they speak on matters of dollars and cents. Martin Feldstein argues that the Obama administration should withdraw its proposal to reduce the charitable tax deduction of higher income (over $250,00 for married couples) donors to 28% from the 33% or 35% benefit they now enjoy. He notes:
“A substantial body of economic research shows that, on average, each 10 percent reduction in the cost of giving raises the amount that a person gives by about 10 percent. ”
Without expressly claiming studies supporting the corollary, he goes on to illustrate that a 10% increase in cost will conversely lower donations. Ironically, his explanation better makes the case for adopting the Obama proposal rather than for defeating it. He points out that the effect of the change from 35% to 28% is a 10.8% increase in the cost of giving. Accordingly, he suggests a donor of $10,000 might reduce his donation to $9,000 or 10%. As a result, the giver would pay $980 more dollars in taxes but save the $1,000 in donation–leaving him ahead $20. He says that:
“This is a hypothetical example, but the responsiveness of giving and tax revenue reflects the evidence regarding how people respond to changes in tax rates.”
Seriously?! To someone who can afford to give $10,000 to charity, the person would short his favorite charity $1,000 so he can have an extra $20 in his pocket? While giving the government $980 instead? This is a slap upside the head duh moment in the sensibility of economic theory. Having made this abundantly clear, I think Martin Feldstein eloquently has affirmed President Obama’s conclusion that this proposal should have little effect on charitable donations and a positive effect on tax revenues. Without this explanation, there might have been some foolish people out there who were actually opposed to the proposal.
Tags: charitable deductions, Feldstein, Obama, taxes
April 6th, 2009 at 4:53 pm
I was confused by your post so I read Feldstein’s article. The confusion started with him. Of course, no one would reduce a donation by $1000 to save $20, but this is not what would happen. Feldstein’s $980 is the difference between 35% of $10,000 and 28% of $9000.
Our hypothetical donor would no longer have the option of getting 35% off on a $10,000 gift so the proper comparison would be based on 28%. By reducing the gift to $9000 the donor would lose a $280 tax credit and therefore have $720 more to spend himself (or herself).
This proves that Feldstein is even more incompetent than you thought (or, at the very least, a really bad writer).
The real argument against Obama’s proposal is that it is extremely unfair. Money donated is not part of spendable income and should not be taxed. I think most Americans would agree with that formulation.
As a practical matter I look back on my youth when I could freely visit museums, zoos without any cost. If I had to pay admission my education would have suffered greatly. Those great institutions were supported by philanthropy. Now they are protected by gates and those who need them the most (the poor and disadvantaged) are no longer welcome.
Bob