Obama’s War on Charity

Those of us concerned with the voluntary sector are puzzled by the dichotomy between President Obama’s professed belief in the importance of the non-profit sector throughout his campaign, inauguration, and early administration, as in this statement:

…the change that Americans are looking for will not come from government alone. There is a force for good greater than government. It is an expression of faith, this yearning to give back, this hungering for a purpose larger than our own, that reveals itself not simply in places of worship, but in senior centers and shelters, schools and hospitals, and any place an American decides.

with his proposal to decrease the deductibility of charitable contributions. As Martin Feldstein outlines, the net effect will be a likely 10% decrease in contributions to charities.

In effect, the change would be a tax on the charities, reducing their receipts by a dollar for every dollar of extra revenue the government collects. It is hard to imagine a rationale for taxing schools, hospitals, medical research budgets and arts organizations in this way.

By 2011, the year in which the Obama administration proposes to start the new tax rule, the projected decrease in giving would surpass $7 billion. With the endowments of charitable institutions sharply reduced by the fall in stock prices, this loss of gifts would make an already bad situation worse.

Charities are already reeling from the sinking economy, with nearly a third having ended 2008 with a deficit, and declining portfolios and incomes forebode further dismal times ahead.

So why, if he really believes that the non-profit sector is an important part of “change,” does Obama not see that this new tax will disproportionately hurt it? Perhaps it’s because he, like most identifying themselves as “liberal,” won’t notice the change in deductibility all that much: their seven years of tax returns released last year show the Obamas contributing an average of just 1.9% of their income to charity. As Arthur Brooks points out, this falls within national giving patterns by ideology:

In May of last year, the Gallup polling organization asked 1,200 American adults about their giving patterns. People who called themselves “conservative” or “very conservative” made up 42% of the population surveyed, but gave 56% of the total charitable donations. In contrast, “liberal” or “very liberal” respondents were 29% of those polled but gave just 7% of donations.

These disparities were not due to differences in income. People who said they were “very conservative” gave 4.5% of their income to charity, on average; “conservatives” gave 3.6%; “moderates” gave 3%; “liberals” gave 1.5%; and “very liberal” folks gave 1.2%.

The most common theory for the cause of the disparity is the difference in the role liberals and conservatives believe government should play in society, with liberals believing government should provide funding for activities that conservatives think are more rightly served by privately-funded non-profits — and matching their giving to their ideology. Thus, Obama may believe that diverting resources from the non-profit to the public sector is an equally good or better way to achieve his goals.

But is it? On average, 85% of contributions to charity go to service, after covering management, overhead, and fundraising expenses. The charities with which I’m most familiar are The Salvation Army, on whose San Francisco and National Advisory Boards I serve, and The Independent Institute. The Salvation Army is the largest provider of services to the poor, including educational services, after the government, and 83% of contributions to it go to direct services. The Independent Institute operates at 86% efficiency.

Unfortunately, government agencies don’t have to report their overhead expense as do private charities, so there’s no real measure of the comparable figure for the efficiency of public spending. Education is the area with the most readily available figures, so using it for comparative services, we find, according to the National Center for Education Statistics, only 52 percent of public education expenditures are spent on instruction.

This means that if Martin Feldstein’s analysis is correct and Obama’s new restrictions on charitable deductions will result in reducing charities’ receipts by a dollar for every dollar of extra revenue the government collects, the government will have to take in $1.63 to achieve the same effect as $1 given to charity.

Kind of turns the whole concept of a “Keynesian multiplier” on its head, doesn’t it?

Mary L. G. Theroux is Senior Vice President of the Independent Institute. Having received her A.B. in economics from Stanford University, she is Managing Director of Lightning Ventures, L.P., a San Francisco Bay Area investment firm, former Chairman of the Board of Advisors for the Salvation Army of both San Francisco and Alameda County, and Vice President of the C.S. Lewis Society of California.
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