Harvard Economist Feldstein on New Charitable Donation Proposal

Harvard economist and member of President Obama's Economic Recovery Advisory Board Martin Feldstein disagrees with the plan to decrease the deduction allowed for high wage earners for Charitable giving. President Obama on Tuesday evening restated his desire to pursue the tax change, calling it a fair proposal. I have posted on this topic in the past, and I am not a proponenet of this proposed change in the tax law, yet many beleive, as the President stated that the weatlhy will continue to give at the same levels. I tend to disagree with that predcition.

In a Washington Post opinion piece Feldstein states 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 charitable institutions to the federal government. But the high-income taxpayers affected by the rule change are likely to cut their charitable giving by as much as the increase in their tax bills, which would, ironically, leave their remaining income and personal consumption unchanged.

In effect, the change would be a tax on the charities, reducing their receipts by a dollar for every dollar of extra revenue the government collects. It is hard to imagine a rationale for taxing schools, hospitals, medical research budgets and arts organizations in this way. I suspect that the administration officials who drafted this proposal did not understand that it would have this perverse effect.

Feldstein continues 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.

To read the Feldstein opinion (which has an excellent example of how the tax will work and how it impacts the donor) in the Washington Post, click HERE.