The Corner

Obviously Obama Hasn’t Read Alexis de Tocqueville

From this morning’s Washington Post:

Even as he urged against demonizing the business class, Obama made clear that he thinks affluent Americans have not been doing their fair share as he defended his plan to shrink tax deductions for wealthy taxpayers’ charitable contributions and mortgage interest payments.

How populist can the president be? Very:

“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. “I think it is a realistic way for us to raise some revenue from people who benefited enormously over the last several years. It’s not going to cripple them; they’ll still be well-to-do. And ultimately, if we’re going to tackle the serious problems that we’ve got, then in some cases those who are more fortunate are going to have to pay a little bit more.”

Obviously, the president doesn’t think that his policies will impact charitable giving and won’t hurt the people who are the beneficiaries of these donations today.

For a good article on why he might be wrong, read Martin Feldstein’s article in yesterday’s Washington Post. He writes:

The administration’s plan would limit the amount that high-income individuals could deduct to 28 percent of their gifts, down from 35 percent, even though 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, an increase of 10.8 percent that can be expected to reduce the total giving of these donors by about 10 percent.

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 concludes:

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. With the endowments of charitable institutions sharply reduced by the fall in stock prices, this loss of gifts would make an already bad situation worse.

Many tax features of the Obama budget should be changed to stimulate the near-term recovery of demand and to strengthen long-term incentives for productivity and growth. But the proposed tax on charitable gifts hits at the foundation of our pluralistic society. The administration should recognize its mistake and withdraw this proposal.

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