Obama to Harm Charities?

Martin Feldstein, Harvard University Economics Professor and one of President Obama's economic advisors on his Economic Recovery Advisory Board has said that the idea to lower the deduction for charitable contributions would not go well for charities. He says:

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.

He goes on to explain how this would work in practice.

Suppose someone would give $10,000 to a university if that amount were deductible at 35 percent. That deduction would reduce the individual's tax bill by $3,500. Limiting the deduction to 28 percent would lower the individual's tax saving on a $10,000 gift to $2,800.

This is where things get interesting: If the 10 percent increase in the cost of giving caused the person to reduce his gift by 10 percent, to $9,000, his tax savings would be 28 percent of $9,000, or $2,520. The government's revenue loss would be reduced by $980 (from $3,500 to $2,520). The person's gift to the university would be reduced by $1,000, almost the same amount. Since this high-income person would pay $980 more in taxes but give away $1,000 less, he would end up with an extra $20 for personal consumption.

He estimates that if this rule had been in place in 2007 charitable contribution would have been $16.5 billion rather than the actual $23 billion. That's a big twinkie. (Obscure Ghostbusters reference)