I watched a good bit of President Obama’s news conference last Tuesday. There were several answers on which I would take issue with him– but I’ll stick to just one, for now. One thing at a time!
Question: Are you reconsidering your plan to cut the interest rate deduction for mortgages and for charities? And do you regret having proposed that in the first place?
OBAMA: No, I think it’s — I think it’s the right thing to do, where we’ve got to make some difficult choices…
Cutting the mortgage deduction might make sense, but would be very unpopular– so it isn’t likely to happen. But what’s this about the charitable deduction? I’d never heard of such a proposal. The reporter followed up:
Q: It’s not the well-to-do people. It’s the charities. Given what you’ve just said, are you confident the charities are wrong when they contend that this would discourage giving?
OBAMA: Yes, I am. I mean, if you look at the evidence, there’s very little evidence that this has a significant impact on charitable giving.
Can he possibly believe this? The math is very simple. Suppose I’m a very charitable person in the 28% marginal tax bracket who is prepared to give $10,000 to a charity. If I actually give $13,900, 28% of this is $3,892 — so I’m only shelling out $10,008. But for a richer giver in the 35% bracket: he can give $15,390 — 35% of which is $5,386, so it only costs him $10,004!
The gov’t makes our giving tax-deductable because we’ve decided (as a country) that foregoing extra tax revenue is more than offset by the good done by what we give freely. And will only allowing those 35%-ers to deduct 28% punish them– those awful people who gross more than $250,000? Well, no– they will adjust their giving accordingly, downwards.
I was glad that in Wednesday’s Washington Post Martin Feldstein made the same point in more detail: A Donation From Charity But we shouldn’t need an economics professor to explain all this to us; anybody who has itemized tax deductions should already knows it.
So doesn’t the President know it? And if he were so challenged by simple math, couldn’t the very smart people around him have explained it to him? Or perhaps they are look forward to the additional $7 billion in revenue which this tax change (by Feldstein’s estimate) would provide? All at the expense of the charities.
Speaking of charity: Mr. Feldstein says, in a very charitable way: “I suspect that the administration officials who drafted this proposal did not understand that it would have this perverse effect”.
If he’s right on that, we are in trouble. If he is wrong, our government is in the hands of some very cynical people. Either way…