Friday, February 27, 2009
Reuters has posted the first of what I'm sure will be many stories about charities' concerns over the effect of Obama's tax plan on donations, a subject I posted about yesterday. But the more I think about this, the more convinced I am that the effect will not be that great. Obama's plan is simply to limit the tax rate applicable to the deduction (and all other itemized deductions) to 28%, not to cap the deduction (e.g., eliminate it over a certain amount). So donors with over $250,000 in income will still get a substantial deduction, just not as much as before - or put concretely, today a $10,000 contribution really costs a top-bracket contributor only $6500, because a $10,000 deduction at a 35% rate is worth $3500 in tax savings. Under Obama's plan, that $10,000 donation now costs $7200. Of course, the worry is that donors will now give only $9300 or so, in order to "make up" for the extra after-tax cost. But econometric studies don't support a "dollar-for-dollar" negative effect on giving, and as I pointed out yesterday, they vary a lot in their predictive models. Moreover, lessons from psychology and behavioral economics tell us that pure math rarely, if ever, accurately predicts behavior due to a variety of other factors (the prestige associated with big gifts, for example) that impact charitable giving. So Peter Orszag is probably right on this one: the actual effect of the change probably isn't going to be much.
So let's not turn this into a doomsday scenario, folks. The truth is, if Obama can fix our health care system, charities as a whole (and everyone else, from GM to the local barbershop) are going to be much better off in the long run.