LETTER TO EDITOR: The cost of giving

OPINION:

Recently, in response to questions about the impact of his tax-reform proposals on charitable giving, President Obama replied, “Now, if it’s really a charitable contribution, I’m assuming that that shouldn’t be the determining factor as to whether you’re giving that $100 to the homeless shelter down the street.”

In fact, there is no reason for him to assume anything. There is a vast body of empirical research on the impact of changes in the tax deductibility of charitable giving on donor behavior. All of these studies indicate that charitable donations are significantly affected by the net price of giving, which equals the after-tax cost of giving $1 to charity. In fact, most of them have shown that it is “Treasury efficient” for the government to stimulate private giving through tax deductions.

Harvard University economics professor Martin Feldstein - mentor of Lawrence H. Summers, the president’s chief economic adviser - wrote in 1975 that “philanthropies would lose more in the contributions they receive than the government would gain in additional tax revenues if the current deduction was eliminated.” While the current proposal does not call for the complete elimination of the deduction, it would clearly increase in the net price of giving for donors who are in the highest tax brackets.

Important data can be found in a study published in the fall 2005 issue of the Journal of Public Policy and Marketing by researchers John Peloza and Piers Steel of the Haskayne School of Business at the University of Calgary. According to the study, the price elasticity of giving was estimated to be no less than -1.1, which means that for every 1 percent increase in donor tax burdens, charitable giving would drop by at least 1.1 percent.

Consider, for example, the case where the net price of giving $100 goes from $65 ($100 minus tax savings in the 35 percent bracket) to $72 ($100 minus tax savings in the 28 percent bracket). This corresponds to an 11 percent increase in the net price of giving. Applying a price elasticity of -1.1, this would result in a 12.2 percent decrease in charitable giving. This negative effect would be greatly magnified in 2011, when the top tax bracket is set to return to 39.6 percent. The current proposal to limit the tax deductibility of donations would increase the net price of giving by over 19 percent.

Thus, it is no surprise that nonprofit charitable institutions - including private universities and academic medical centers - are protesting this change in tax law. These are the same institutions that have been hurt by 25 to 40 percent drops in the value of their endowments and reduced donations due to the current economic climate and investment fraud. Of course, if former Secretary of Labor Robert Reich is correct and the ultimate goal is to use the additional tax payments to expand the government’s role in these activities vis-a-vis private philanthropy, then the president’s proposal is exactly the right prescription.

SUSAN FEIGENBAUM

Department of Economics

University of Missouri-St. Louis

St. Louis