Posts Tagged ‘income effect’

The economics and politics of charitable giving

January 4, 2013

For American tax exempt organizations, 2012 may prove to be a bumper year in terms of receipts from wealthy donors. In comparison, 2013 may prove to be much leaner.

Higher taxes on the wealthy, signed into law by President Obama two days ago, will adversely impact charitable giving by individuals earning in excess of $400,000 per annum in two ways. First, higher marginal tax rates reduce the wealth of such individuals. Since charitable giving is a normal good, this reduction in wealth will impact adversely as an income effect on charitable giving. Second, new limitations on marginal tax rates applicable for tax relief reinforce the income effect with a negative substitution effect. The price of charity is now higher in terms of alternatives foregone.

Inevitably, commentators untrained in basic economics will decry such observed declines in charitable giving as disgusting. ‘One gives to charity out of the goodness of one’s heart’, they will whine and moan. Of course, they will be correct in so far as that statement goes. Unlike government transfers, private charity is not coerced. It is indeed an expression of altruism, or at least of enlightened self-interest.

However, in a world characterized by scarcity, altruism and enlightened self-interest are inescapably impacted by economic forces:

“The fact is that when government reaches into someone’s wallet, there is less money left in the wallet to spend or donate as its owner sees fit. When the government raises tax rates and limits deductions, there are consequences – and in this case the government is making the job of private charity even harder….Just this week we learned that former Vice President Al Gore tried to complete the sale of his current TV network to al-Jazeera before Jan. 1 so he wouldn’t be hit by the new tax rates…Giving and caring run deep in the American character and help unify a much divided nation. But when the government goes too far in taking, it ends up with more people to give to and care for, because the private sector and charities have less.” Ari Fleischer, ‘The Taxman’s Uncharitable New Rule’, The Wall Street Journal, January 4, 2013

Progressives understand these issues well. By curtailing private charity, they aim to increase dependency on the state, and thus to pile up endurable winning coalitions for a social market economy.


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