The title of this post is a quote from an English professor at a friend’s school who was looking at the university’s budget during a university-wide meeting. My friend’s argument was that if you preface a comment by saying that you can’t do math, then you probably shouldn’t be criticizing something based entirely on numbers. Well I think I’m pretty good at math and I found something wildly inaccurate in Obama’s new budget, so I’m going to criticize it.  Obama proposes decreasing the tax benefit received by families earning over $250,000 per year, aka “the wealthy,” for their charitable donations. According to the Washington Times, this move is expected to increase tax revenues by $179.8 billion over 10 years, or on average about $18 billion per year. 

Okay, let’s analyze this, shall we? If the highest marginal tax rate is currently 35%, this means that when a rich person donates $100 to charity, they currently save $35 on their tax bill. It’s a nice little bonus that I’m sure gets more rich people donating than otherwise would, but we’ll get back to that later. While the highest marginal tax rate will increase to near 40% under Obama’s plan, the rate for charitable deductions will actually be reduced to 28%, meaning that a rich person will only save $28 in tax liability by donating $100. The difference, $7 for every $100 donated, is the extra money going to the government. The fact that the administration thinks it is going to get $18 billion per year from this tax means that they must assume that rich people would have to donate $257 billion. Here’s how I get that number: $257 billion donated to charity by wealthy people would give them $90 billion in tax deductions, and Obama takes 1/5 of that, giving him $18 billion. I repeat: in order for Obama to expect to receive $18 billion from this tax, he would have to expect these wealthy people to donate $257 billion to charity.

Now let’s look at the facts. In 2006, a total of $295 billion was contributed to charity, $223 billion of this coming from individuals. But according to the Bureau of Labor Statistics, only 37% of charitable contributions by individuals is from people earning above $150,000; the amount coming from people earning above $250,000 must therefore be less than 37%. I would roughly estimate it at 30%, but in the interest of being charitable, I’ll just assume it’s the full 37%. (This makes Obama’s case better, but he still has no chance here as you’ll see in a second.) Based on these numbers, the wealthy people that would be affected by Obama’s tax plan would have contributed approximately $83 billion to charity in 2006. His budget assumes they donate $257 billion. Obama is off by a factor of THREE. (If you include non-cash contributions claimed on taxes, this is estimated at another $50 billion for all taxpayers, so 37% of that is another $18.5 billion donated by the wealthy, so the Obama budget is only off by a factor of 2.5. It’s still not even close.)

Now, if you’re like me, you’re probably thinking that this is going to hurt charities. In fact, people on both sides of the aisle are saying just that today. But when confronted with the possibility that this might lead to fewer charitable contributions, Office of Management and Budget Director Peter Orszag actually said this yesterday:  ”Contained in the recovery act, there’s $100 million to support nonprofits and charities as we get through this period of economic difficulty,” he said. $100 million. That’s what they’ll get to compensate them for any reduction in private charitable contributions.

Is he serious? He’s actually saying that people who currently contribute $83 billion to charity annually would not reduce their charitable contributions by more than $100 million? That would be a .12% decrease. Do you think that wealthy people will cut their contributions by only .12% when their tax break is cut by 20%? For these people, the price of charitable contributions used to be $.65 per dollar of service purchased and now it’s going to rise to $.72 per dollar of service purchased, which is a 10.2% increase in the price of contributing to charity (using the midpoint formula). For you economics students, that’s a price elasticity of demand of -.012. NOTHING is that inelastic, not even crack cocaine. The only word I can think of for this: absurd.

So here are the facts. Obama won’t be able to collect all of this revenue through this tax change — he’ll get about a third of it if he’s lucky and charitable contributions by wealthy people are unaffected, but contributions will probably drop and he’ll get even less than that. Anybody looking at the magnitude of charitable contributions vs. the amount the Obama budget would give to charities would have to conclude that charities will be worse off. In a recession, when more people are losing their jobs and cutting back on spending, and more people can actually benefit from food banks and other charitable services, the administration proposes this? I just don’t understand it….

Charities provide wonderful services for people in this country who have hit a rough patch. By using volunteer labor, charities keep their operating costs lower than many other firms. Obama says he needs this tax revenue to fund social projects to help people. But every dollar given to charity goes much further towards helping people than a dollar given to government. Second Harvest Heartland says that every dollar donated to them allows them to distribute $9 worth of food, and that’s why I donated some money to them last year. It seemed much more effective than buying food at the grocery store and donating it to the charity bin there. Changing tax policies in a way that will reduce charitable contributions is not only bad economic policy, it’s bad social policy, especially in a recession. I hope when Congress starts debating this proposed legislation, they’ll eliminate this horrible change to our tax code.

Update 3/4/09: On Special Report tonight, a story indicated that the people in this top tax bracket made 28% of the donations to charity last year. I was being charitable and assumed it was 37%. This fact makes Obama’s case even worse.