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Chad Aldeman: Obama Tax Changes Will Boost Short-Term Giving

By Matthew Yglesias on March 3, 2009 at 4:20 pm

"Chad Aldeman: Obama Tax Changes Will Boost Short-Term Giving"

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Chad Aldeman has a very interesting post in which he cites some NBER data indicating that the timing of charitable giving is very sensitive to tax policy shifts to argue that Obama’s proposed change to rich people’s ability to itemize deductions will provide extra economic stimulus

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Upon taking office in 1981, President Reagan lowered the highest income tax bracket from 70 to 50 percent. As this rate fell, high-income tax filers had lower tax incentives to donate to charity. In 1986, Reagan proposed lowering the rate again, this time to 33 percent. Before the tax provisions took effect but while the proposal was being discussed, charitable contributions from high-income tax filers rose. That’s the spike you see in 1986. The rate lowered again the following year, and it stayed relatively constant until 1993. President Clinton had campaigned on raising the highest-income tax brackets, and he set about to do that once in office. Note the big giving spikes around 1992 and 1993. President George W. Bush successfully lowered the top rate in 2002, and again, the giving rate responded.

All this is to say that tax policy works in the short-term. Givers are very responsive to changes in charitable deduction rates, and they modify the timing of their gifts. If President Obama wants to stimulate giving in the short-term, lowering the rate on deductions is the best way to do it. If donors have the option of deducing 35% of their tax rate this year or 28% next year, they’re going to do it now. His proposal actually stimulates giving in the short-term.

Sounds clever.

This is a reminder that nonprofits have an unfortunately pro-cyclical character. The very time when well-endowed foundations are likely to have ample funds to disburse is the exact same time when wealthy individuals are inclined to be in a giving mood. Then down goes the economy and both the grants and the individual donors dry up. Except times of trouble are exactly when people need poverty. Back in 1999, there was basically nothing stopping any healthy, properly motivated individual from finding a job. Perhaps not a good job, but still a job. Here in 2009, it’s not like that at all. Nonprofits are needed. But they have less capacity than they would if there were a boom and nobody needed them.

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