Give charity a break

Wednesday, April 15, 2009

By Darrell Hawkins

“Those who cannot remember the past are condemned to repeat it.”
– George Santayana

Jackson Hole, Wyo.-The Obama administration is proposing that charitable contributions should receive a lower rate of deductibility than has previously been granted and assume that this will have no effect on giving.  They propose that high income individuals (those couples  making over 250,000 per year or singles making over 200,000) will have their rate of deductibility reduced from the top rate (now 35 percent ) to a lower rate of 28 percent at the same time having their income taxed at a new higher maximum rate.

Martin Feldstein is president emeritus of the National Bureau of Economic Research and has written an engaging article in the Washington Post describing why this is a bad idea:

“What would this mean in practice? Suppose someone would give $10,000 to a university if that amount were deductible at 35 percent. That deduction would reduce the individual’s tax bill by $3,500. Limiting the deduction to 28 percent would lower the individual’s tax saving on a $10,000 gift to $2,800.

This is where things get interesting: If the 10-percent increase in the cost of giving caused the person to reduce his gift by 10 percent, to $9,000, his tax savings would be 28 percent of $9,000, or $2,520. The government’s revenue loss would be reduced by $980 (from $3,500 to $2,520). The person’s gift to the university would be reduced by $1,000, almost the same amount. Since this high-income person would pay $980 more in taxes but give away $1,000 less, he would end up with an extra $20 for personal consumption.”

And Feldstein’s conclusion: “By 2011, the year in which the Obama administration proposes to start the new tax rule, the projected decrease in giving would surpass $7 billion.”

The president is dismissive of such analysis:

“If it’s really a charitable contribution, I’m assuming that [smaller tax savings] shouldn’t be a determining factor as to whether you’re giving that $100 to the homeless shelter down the street,” he said.

Well now, maybe it is time for a bit of a refresher course in how tax policy affects behavior.  In 1991, Congress levied a 10-percent luxury tax which included boats valued above $100,000. Almost immediately, it was noticed that something was amiss-the taxes yielded $97 million less in their first year than had been estimated as people were buying a lot fewer boats or buying them overseas. Yacht retailers reported a 77-percent drop in sales that year, while boat builders estimated layoffs at 25,000. With bipartisan support, the tax was repealed in 1993.

The National Center for Charitable Statistics, estimates that in 2006 there were more than 4,400 nonprofit organizations in Wyoming.  Nearly 200 nonprofits participated in last years Old Bill Fun Run.  Charitiable donations are important to Wyoming and Jackson Hole. The administration’s proposal to reduce the deductibility of philanthropic giving appears more punitive than practical and ignores the maxim that tax policy changes taxpayer behavior. PJH

PERMALINK:
Give charity a break | Planet JH News Article: Right Wing Local

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