Wednesday, March 25, 2009

Feldstein on the Charity Tax

One basic lesson of tax incidence (see Chapters 6 and 12 of my favorite textbook) is that the burden of a tax does not always stay where our political leaders try to put it. My Harvard colleague Martin Feldstein gives an example:
President Obama's proposal to limit the tax deductibility of charitable contributions would effectively transfer more than $7 billion a year from the nation's charitable institutions to the federal government. But the high-income taxpayers affected by the rule change are likely to cut their charitable giving by as much as the increase in their tax bills, which would, ironically, leave their remaining income and personal consumption unchanged.
Continue reading here.