A DEDUCTION FROM CHARITY

March 27, 2009

President Obama's proposal to limit the tax deductibility of charitable contributions would effectively transfer more than $7 billion a year from the nation's charities to the federal government.  But the high-income taxpayers affected by this change are likely to cut their giving by as much as the increase, ironically, leaving their remaining income and personal consumption unchanged, says Martin Feldstein, president emeritus of the National Bureau of Economic Research.

The proposed tax change would apply to married couples grossing $250,000 or more and single people with incomes greater than $200,000 by limiting their deduction amounts to 28 percent of their gifts (down from 35 percent).  However, their incomes would still be taxed at a higher marginal rate.  This raises the cost per dollar of giving from 65 cents to 72 cents.

What would this mean in practice, asks Feldstein?

  • Suppose someone would give $10,000 to a university if that amount were deductible at 35 percent; that would reduce the individual's tax bill by $3,500.
  • Limiting the deduction to 28 percent would lower that individual's tax savings to $2,800.
  • 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 just be $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.
  • Moreover, since this person would pay $980 more in taxes but give away $1,000 less, he would end up with an extra $20 for personal consumption.

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, says Feldstein.  The proposed tax hits at the foundation of our pluralistic society. 

Source: Martin Feldstein, "A Deduction From Charity," Washington Post, March 25, 2009.

For text:

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/24/AR2009032402462.html

 

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