Brandon Moyse | Disincentivizing donations

Lately, President Obama has been all over talk shows, Sunday morning news programs and the Internet trying to sell his bloated budget. But he hasn't sold me.

Among his numerous planned tax increases on the upper income brackets is a proposal to cut tax breaks on charitable donations from 35 percent to 28 percent, effectively increasing the cost of giving.

As anyone who has taken Econ 001 knows, when cost increases, demand decreases - in other words, people will donate less to charity. Considering that universities are the largest targets of donations from wealthy individuals, institutions of higher learning across the country - Penn included - will feel the negative effects. I don't see the benefit of taking money out of nonprofits' pockets and putting it in the hands of the most bureaucratic, least-efficient charity in the country: the U.S. government.

"My concern about it is the psychological impact at a time where nonprofits are so hungry for philanthropic support," said John Zeller, vice president of Development at Penn. "It is very unsettling in this environment."

Under the current tax provisions, if someone in the highest bracket (which begins around the $300,000 range) donates $10,000 to a charity, he would receive a reimbursement of $3,500 from the government. Under the Obama plan, donors from the highest bracket would only be reimbursed $2,800. So if a donor wanted effectively to spend the same amount as before - $6,500 - he'd only be able to give $9,000 to charity. On top of that, the administration wants to raise income-tax rates from 35 percent to 39.6 percent for the highest earners, which will only exacerbate the cost of giving.

Obama argues that he's merely trying to close the gap between the tax benefits that low-income and high-income donors enjoy. But not all donors are created equal - in 2006, the highest-earning 2 percent of taxpayers provided 28 percent of charitable donations. In doing so, then, he's ensuring that fewer dollars will find their way to nonprofits. Some might argue that tax breaks are not the primary motivator behind donations and that the wealthy will continue to give as much as before. But the latter is simply not true.

Wharton professor Jennifer Blouin explained that economic literature shows a 10-percent increase in the cost of giving can result in a 10-percent decrease in donations. Furthermore, she added, this would be the first time that there was such a disparity between the income-tax rate and the charitable-deductions rate. (In the 1980s under Reagan, the deductions rate was 28 percent, but so was the tax rate). In short, we could see a 20-percent-plus decline in donations from the wealthy.

"The U.S. government wins," she said of its increased revenues. "Who loses? The charities."

The Indiana University Center on Philanthropy analyzed how charitable donations by the wealthy in 2006 would have been affected had the Obama tax plan been in place. It found that the top bracket would have decreased giving by nearly $3.9 billion. And that's when the economy was good.

Granted, Penn has an extensive, extremely wealthy alumni community to tap. The University has had one record-breaking fundraising year after another, and Zeller said it is ahead of its target thus far this year. But, he added, "we are seeing the impact of the economy starting to slow us."

Moreover, the University can't rely on its big donors to pull it through tough times. Historically, if one were to break down donations from $1 to $99,999, $100,000 to $999,999, $1 million to $5 million and $5 million up, Penn receives approximately 25 percent of its donations from each category.

Other universities are starting to feel the effects of the economy, and it is hurting students directly. The New York Times recently wrote about colleges that are need blind having taken steps to bolster their finances by actively admitting more students of means.

For a president that has placed so much emphasis on making higher education more accessible and affordable, the plan to reduce tax breaks on charitable donations - to artificially reduce wealth disparity - is incomprehensible. Luckily, Congress is putting pressure on the President to abandon that part of the budget. We, the students who helped elect him (well, not me), should too.

Brandon Moyse is a College junior from Montreal. He is the former senior sports editor of The Daily Pennsylvanian. What Aboot It, Eh? appears on Thursdays. His email address is moyse@dailypennsylvanian.com

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