EconomistMom.com
…because I’m an economist and a mom–that’s why!

EconomistMom.com

Grover, They’re Just Not That Into You Anymore

November 27th, 2012 . by economistmom

grover-newsday-photo

Some pledges are meant to be broken, once the only reason you’re keeping them is because those you’ve made them to keep telling you (in not such nice ways) “but you promised.”  People grow up and grow out of marriages, for example, because, quite frankly, we were not mature enough when we made the promise to really understand what we were doing or even who we are.  And so it goes with the pledge so many in this town have made to this man named Grover (who is really more like Oscar the Grouch).  On the front page of today’s Washington Post, Aaron Blake writes (emphasis added):

Norquist, a zealous, self-promoting Washington icon who ­presides over a weekly meeting of top conservative players, has quietly amassed an extraordinary amount of power in the Republican Party without ever being elected to office. The 56-year-old president of Americans for Tax Reform is a former Reagan-era operative who launched his pledge in 1986, wheedling and cajoling so many GOP lawmakers into signing it over the years that it has become a Republican rite of passage. He keeps the source of his power, the original signed pledges, in a secret fireproof safe.

But now some Republicans are openly pining for the days when Norquist’s specter didn’t loom over their budget dealings. Among them is strategist John Weaver, a former top adviser to Sen. John McCain (Ariz.) and moderate 2012 presidential candidate Jon Huntsman Jr.

“The party and conservative movement will no longer be held hostage by a Washington, D.C., lobbyist,” Weaver said. “Obviously the party will always be the one standing for lower tax rates and more efficient government, but to compete for the right to govern nationally, party leaders must — and ultimately will — act responsibly.”

And so it may go with (even) the promise President Obama first made to 98 percent of us two campaigns ago–that our tax burdens would not go up in any way–when it becomes more obvious that the politics combined with the basic math make keeping that promise the wrong thing to do.

35 Responses to “Grover, They’re Just Not That Into You Anymore”

  1. comment number 1 by: reflectionephemeral

    Well, sure, someone who advised Jon Huntsman wishes Norquist would go away. He wants a Republican Party that doesn’t exist.

    Sticking with Grover might not be for the good of the party overall– much less the country– but pretty much every Republican officeholder is better off by doing so. They all have to look over their shoulders at some Mike Lee or Richard Mourdock or Christine O’Donnell.

  2. comment number 2 by: Mark

    I am a huge fan of Tuchman’s history “March of Folly”. In the book she recounts repeated examples of people in leadership roles who were enamored of their folly. A series of popes, prior to the Reformation, each repeating the same egregious mistakes were one example. King George III and the British Parlaiment, repeatedly ignoring what current events were actively telling them was the next. It seems to me that Norquist, and that crowd, would have fit right in with those august bodies. No wisdom, ignore history, or twist it to fit what you want.

  3. comment number 3 by: Marlene Resnick

    It seems to me that elected officials make a promise to uphold the Constitution, as well as to work for the country and the people that they represent. Isn’t a promise to another entity that is held above and beyond the interest of the country and its well being highly unpatriotic?

  4. comment number 4 by: Vivian Darkbloom

    “It seems to me that elected officials make a promise to uphold the Constitution, as well as to work for the country and the people that they represent. Isn’t a promise to another entity that is held above and beyond the interest of the country and its well being highly unpatriotic?”

    I’m no fan of open-ended pledges, particularly on fiscal policy, primarily because circumstances do change. As far as promises are concerned, it’s generally not advisable to make them unless the person promising is able and willing to keep it.

    Nevertheless, as regards the Americans For Tax Reform pledge, the preamble to the House version begins:

    “I, __________, pledge to the taxpayers of the _____ district of the state of _________, and to the American people….”

    The persons to whom that is directed have a lot in common with those to whom the following pledge was directed, with the exception that the following was made not to all Americans, but only 98 percent of American taxpayers (at a given point in time). I guess, in a sense, that makes it quite a bit less patriotic than the ATR pledge.

    ““I can make a firm pledge. Under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”

  5. comment number 5 by: Jim Glass

    They were *never* into Grover.

    Politicians do whatever it takes them to get elected/ re-elected in the short run

    If signing Grover’s pledge helps in the next election, they sign the pledge.

    If having signed Grover’s pledge hurts them in the next election, then they don’t just immediately drop the pledge overboard but also brag about doing it and rush to get on TV saying they have — and all those signed papers he keeps locked away in his safe obtain a best use of being shredded to make confetti for the next local fireman’s parade.

    This is not exactly rocket science political economics. The “commitment problem” for politicians is a huge issue in all political systems, since as they respond overwhelmingly to short-run incentives, it is a very very challenging problem to find ways to hold them to their promises when they can profit by breaking them.

    This operates at all levels of the political system, even day-to-day. There’s a whole literature about how the Congressional committee system rules have developed to prevent the members of congress from double-crossing each other on a monthly, weekly, even daily (literally) basis.

    In the private sector, we all deal with this by the law of contract. You make a promise to me and then break it, I sue your butt off and make you behave as you promised, or pay me damages for not doing so.

    But politicians do not let themselves be sued for breaking their promises — so, as Petronius said about the promises of a woman in love, they might was well “be written in the wind, and in running water”.

    If Grover thought those papers he keeps in his safe were solid investments he could build his future upon, he was kidding himself. :-(

    But don’t take too much cheer in seeing Grover have the rug pulled out from under him. Nothing about the political process has changed, and the implications of all this for the prospects of any long- term reform involving current sacrifice — even if the current sacrifices are modest and would produce huge long-term benefits — are dishearteningly obvious.

    We can see the result in the universal Olympian ability of politicians everywhere around the world to play “Kick The Can Down the Road” until crises arrive.

    Someone propose a law letting citizens sue politicians for breaking their promises. Send it to Congress. See how much support it will get there. Until then … you’re not a cynic as long as you are being realistic.

  6. comment number 6 by: AMTbuff

    Norquist has the bad cop role, allowing legislators to play good cop: “Help me out on restructuring entitlements so that I can talk that bad cop Norquist into accepting some new revenue”. Norquist’s bad cop act attempts to move any deals to the right.

    Attempts to neutralize Norquist during these negotiations are intended to move the deal to the left, toward more revenue and less restructuring of spending programs. That’s a can-kicking approach which the country can’t afford.

    We are well past the time for temporary patches to the entitlement gap. We need a permanent fix ASAP to lift the huge fiscal cloud hanging over our economy.

  7. comment number 7 by: AMTbuff

    Durbin says he wants higher taxes on the rich without linkage to entitlement reform: http://abcnews.go.com/blogs/politics/2012/11/durbin-wants-no-entitlements-in-fiscal-cliff-deal/

    Hennessey says that Obama can’t afford not to get a deal regardless of how bad the deal is for him: http://keithhennessey.com/2012/11/27/the-president-is-bluffing/

  8. comment number 8 by: Jim Glass

    I think Hennessey is engaged in presumptuous wishful thinking in thinking he knows was Obama is “really” thinking.

  9. comment number 9 by: El Gipper

    Economistmom congratulates herself by focusing on budget deficits, when the real problem is the trillions of dollars of unfunded liabilities due to Social Security and Medicare. She, and her ilk on the Left, have no stomach for tackling the fiscal disaster solely of their creation.

    The entitlement spending timebomb was created by Democrats, not Republicans (excepting Medicare Part D, which Democrats did not oppose in principle). Until Democrats get serious about reigning in spending, why should Republicans lose elections by voting for tax increases to pay for the Democrats’ welfare state?

    I blame Norquist because he focuses on taxes, not spending. Any coward can be against raising taxes. It takes a real soldier to cut spending.

    Norquist and Economistmom are 2 faces to the same cynical coin of Washington DC politics. They both ignore the serious problems of entitlement spending while acting like serious policy analysts talking about taxes. Whoopeee!

  10. comment number 10 by: Patrick R. Sullivan

    ‘People grow up and grow out of marriages, for example, because, quite frankly, we were not mature enough when we made the promise to really understand what we were doing or even who we are.’

    You’re a mom?

  11. comment number 11 by: AMTbuff

    Patrick, you don’t have to make it personal.

    It’s axiomatic that we sometimes make unwise promises. Our government did that with entitlements, particularly health care entitlements, including ObamaCare. These promises need to be broken. They will be broken. The only question is when and by whom. That’s what the fight is over.

  12. comment number 12 by: Brooks / Gordon

    Patrick — Shut the f–k up.

  13. comment number 13 by: Patrick R. Sullivan

    If it isn’t personal, why is the first word in the title, ‘Grover’?

  14. comment number 14 by: Patrick R. Sullivan

    Nor am I the first to notice;

    http://www.amazon.com/Fair-Play-ebook/dp/B0053GI7XS

    ‘Landsburg returns to address fundamental issues like fairness, tolerance, morality and justice—issues that are as important on the playground as they are in the marketplace. With the help of his daughter, Cayley, he contrasts the wisdom of parents with the wisdom of economists—not always to the credit of the latter.’

  15. comment number 15 by: ST Dog

    I thought the same thing Patrick. There was a time when promises meant something. Not sure this is the appropriate place to discuss it though.

  16. comment number 16 by: Vivian Darkbloom

    Not so long ago, when people still communicated by letter, the sage advice of Mom’s and Dad’s was to put those letters in the drawer overnight and re-read them again the next day before posting.

    Alas, times have changed. I guess we’re all guilty, to one degree or the other, of hitting that send button before sufficiently reflecting on the substance of what we’ve written and how it has been phrased.

  17. comment number 17 by: B Davis

    Patrick R. Sullivan wrote:

    ‘People grow up and grow out of marriages, for example, because, quite frankly, we were not mature enough when we made the promise to really understand what we were doing or even who we are.’

    You’re a mom?

    AMTbuff replied:

    Patrick, you don’t have to make it personal.

    Patrick R. Sullivan replied:

    If it isn’t personal, why is the first word in the title, ‘Grover’?

    I don’t follow your logic. If you had called EconomistMom by her first name Diane, there would have been no complaint. The complaint is that you questioned her momhood because of one line suggesting that there are valid reasons to end some marriages. If others replied to your comments with “You’re a grown-up?”, you might take some offense.

    I would suggest that a “grown-up” response would have been to discuss under what conditions it is or is not valid to end a marriage and/or to go back on a pledge not to cut taxes. In the latter case, at least, I would suggest that it is when that pledge conflicts with more important pledges (such as the pledge to serve the American people to the best of their ability). In any case, I don’t think that the grown-up response is to question someone’s qualifications as a mom.

  18. comment number 18 by: AMTbuff

    If others replied to your comments with “You’re a grown-up?”, you might take some offense.

    http://en.wikipedia.org/wiki/File:Internet_dog.jpg

  19. comment number 19 by: Brooks / Gordon

    Mankiw: Why the President is Not So Keen on Just Limiting Deductions http://gregmankiw.blogspot.com/2012/12/why-president-is-not-so-keen-on-just.html

    “The math”, per the White House, on revenue from a $25k cap limited to households $250k+.

  20. comment number 20 by: Brooks / Gordon

    Some help, please.

    My understanding is that, to avoid the spending cuts per the sequestration of the BCA, $1.2 trilion in “deficit-reduction” over 10 years must be enacted, but this “deficit-reduction” need not be all spending cuts (it could, alternatively, be a mix of spending “cuts” and “additional” revenues, or theoretically even all additional revenues).

    1. Is the above correct?

    (I put some elements above in quotes not to imply or ask if they are the language of the BCA, but rather because the language doesn’t necessarily fit reality re: actually reducing deficits, cutting spending, etc.)

    2. Also, my understanding is that this $1.2 trillion of required deficit-reduction is vs. the current law baseline — correct?

    3. If so, doesn’t that mean that any deficit-reduction achieved by allowing any or all of the “Bush” tax cuts to expire can’t count toward the $1.2 trillion, since that expiration and the associated revenues are already assumed in the current law baseline?

    4. Would that also mean that extending some/all of the “Bush” tax cuts would require $1.2 trillion in deficit-reduction PLUS further deficit-reduction equal or greater to the amount of forgone revenues from extending the tax cuts (i.e., extending current tax rates)?

  21. comment number 21 by: Vivian Darkbloom

    Regarding that White House math:

    Gene Sperling is apparently not up to date on the President’s own budget. The blog entry that Sperling made on the White House website maintains that limiting *itemized deductions* to $25,000, phasing them out over $250K *and* excluding the deduction for charitable contributions from this limit would yield only $450 billion over ten years. The sudden concern is that these limits would hurt charitable giving.

    The charitable giving canard was also recently featured in the NYT editorial on Boehner’s proposal to raise $800 billion from reducing tax expenditures with the comment

    “If Mr. Boehner had used a calculator, for example, he would have discovered it is impossible to produce $800 billion in revenue from eliminating deductions without severely curtailing the deduction for charitable donations, which is vital to the nonprofit sector. Doing so without limiting the charitable deduction would inevitably raise taxes on the middle class, as nonpartisan analysts have concluded, and would have a much greater effect on the upper middle class than on the very rich.”

    http://www.nytimes.com/2012/12/04/opinion/speaker-john-boehner-makes-an-offer.html

    What Sperling and the NYT seem to forget is that *the President’s own budget proposal* goes much further than that. (Note to the NYT Editorial Board: By your logic, Obama intends to significantly raise taxes on the “middle class”).

    To wit, that budget proposes to reinstate PEP and Pease for high income taxpayers. PEP restricts the use of the personal exemptions and Pease phases out itemized deductions so that ultimately only 20 percent are allowed. That phase-out *includes* charitable deductions. The administration has estimated that these two items would raise $165 billion over ten years.

    Second, the *President’s own budget* also proposes to layer on top of the Pease phase-out a new provision to limit the remaining deductions (and certain exclusions, see below) to 28 percent benefit per dollar of allowable deduction/exclusion.

    Sperling would have it in his “new” math that we only count reductions to *itemized deductions* whereas *the President’s own budget proposal* includes not only itemized deductions in that 28 percent limit, but also State and local bond interest, employer-sponsored health insurance paid for by employers and health insurance costs of self-employed persons, contributions to IRA’s and defined contribution retirement plans, deduction for income from domestic production activities, certain employee trade and business expenses, moving expenses, contributions to HSA’s and Archer MSA’s and interest on education loans.

    The President’s budget estimates the 28 percent limit would raise another $584 billion over 10 years. The total of those two provisions would be $749 billion over 10 years. That’s a lot higher than Sperling’s new math and not so far off from Boehner’s proposal. One could easily reduce that 28 percent to a lower percentage to reach the target revenue goal.

    This new concern over charitable given strikes me as intentional obfuscation. Besides, limiting the tax benefit for charitable contributions strikes me as a fine idea. Why should I subsidize someone’s decision to make a deductible contribution to the NRA, the AARP or Planned Parenthood?

    Given the obvious agreement on restricting tax expenditures, I suggest the parties agree on the following on the tax side to get us over the fiscal cliff. This would give what both parties seem to have in common as to what they want:

    –Extend the tax cuts for the “middle class”;
    –Raise revenue on “the rich” by eliminating tax expenditures *in the manner the Administration has proposed* to the tune of $800 billion.

    Add to that at least $1.6 trillion in real spending cuts less than the President was said to offer last year).

    The rest can be dealt with later, as usual.

  22. comment number 22 by: Vivian Darkbloom

    And, back in July 2011, the math apparently did tend to work, not only for $800 billion, but $1.2 trillion, according to the President’s account of his own offer during the debt limit talks:

    http://www.realclearpolitics.com/video/2012/12/05/obama_in_2011_we_can_get_12_trillion_in_revenue_without_raising_rates.html

    I doubt very much that the President’s own offer of $1.2 trillion involved raising revenue from the “non-rich”.

  23. comment number 23 by: Vivian Darkbloom

    So, now yesterday, in an interview with Bloomberg, Obama claimed that only $300 to $400 billion could be raised by eliminating loopholes and lowering deductions. You can see that in the following video by listening to the first 4 minutes.

    http://www.huffingtonpost.com/2012/12/04/obama-bloomberg-interview_n_2237806.html

    So, what I would like to know from the math experts out there is how we got from

    1. $749 billion in the President’s own budget proposal;

    to

    2. $1.2 trillion he said was possible (indeed it was *his* offer) in the 2011 debt limit talks (see link in prior comment);

    to

    3. $300 to $400 billion he now says is possible in the current discussions.

  24. comment number 24 by: Brooks / Gordon

    Vivian,

    I don’t have time to get into your argument(s) re: the numbers, so I’ll just address a conceptual element of your comment: the deduction for charitable contributions.

    First, as you may recall, I am no fan of tax deductions/credits/exclusions generally. Also, I consider your objection to being forced to subsidize other individual’s philanthropic choices a reasonable objection.

    But that said, there are alternative perspectives on the charitable deduction itself, and on Obama’s argument, that I also consider reasonable:

    First, very substantial limitation on this deduction (directly or via an overall cap on deductions that don’t exclude it) it may be politically unrealistic, and not even something that Republicans would actually propose and vote for, particularly if they could actually get it enacted and have to live with the political consequences. If so, Obama is just incorporating into his position and arguments a limit on what is plausible and even seriously sought by the Rs.

    Second, viewed more broadly than merely the progressivity of the tax code, Obama is seeking a progressive way to raise revenue in the broader sense of not harming those who aren’t “rich”, meaning not just that the non-rich won’t pay more, but also that they aren’t hurt too much by the tax changes that directly affect the rich. Yes, any adverse macroeconomic impact on higher taxes on the rich harms the non-rich too, but, at least quite arguably, a change in the tax code that would cause a very substantial, precipitous drop in philanthropy would have a severe — and severely regressive — impact (on the beneficiaries of charities and other non-profit entities). From this broader perspective (of tax incidence, so to speak), one could say that a very substantial reduction in the deductibility of charitable contributions would be like imposing a substantial tax falling heavily on many poor and other non-rich people, and would violate the core principle of Obama’s revenue-raising effort (progressivity).

    As for the deduction itself, consider this perspective: We, as a society, choose to redistribute income in various ways and also to pool it in various ways, for the benefit of some segments in need and for the general public. Much of this is done via government, chosen (very imperfectly) by the people via the political process, and funded via compulsory contributions under threat of criminal prosecution. But, arguably, we have chosen, at least implicitly, to fund some such redistribution (in form of services, cash, whatever) by having taxpayers subsidize the choices of individuals and groups/entities in the private sector rather than having politicians collect the funds and choose how to allocate them. One can reasonably argue that this may be more efficient (in various ways) and may provide greater liberty, too.

    And related to the above, one could argue that we have implicitly decided roughly on the current level funding of all those non-profit entities, and have chosen to allow a portion of it to be directed privately rather than government confiscating more in taxes and allocating it, so changing the tax code in a way that removes much of this private funding — by removing the public subsidy (cost-sharing) — would call for replacing those funds lost by those non-profits via additional taxation and public/government (i.e., taxpayer) funding.

    Lastly, any such change would have to be phased in, lest non-profits across the nation receive financial shocks that could be devastating. (And presumably, during that phase-in period, many of them would lobby for public (taxpayer) funds to replace projected lost private funds.)

    Again, I think you’re view is not unreasonable, but neither are the above perspectives. Personally, I’m ambivalent.

  25. comment number 25 by: Brooks / Gordon

    Eeesh, two grammatical errors (at least) in my comment. Should be “individuals’” (plural possessive) and “your view”. Sorry if I made anyone cringe.

  26. comment number 26 by: AMTbuff

    Brooks, I find the “matching grant” aspect of the charitable deduction compelling. A tax credit for contributions would have a very similar advantage. I think Bowles-Simpson proposed that.

  27. comment number 27 by: Brooks / Gordon

    AMT,

    When you say “tax credit”, is the only difference between what you have in mind and deductibility that it would be a fixed amount (assuming it didn’t exceed the prior tax liability) and would lower tax liability dollar for dollar, as opposed to deductibility which is cost-sharing (not dollar for dollar) and which is partly a function of one’s marginal tax rate?

    And is the only difference with the matching grant (vs. deductibility) that the cost-sharing percentage would be the same for everyone rather than varying by each person’s marginal tax rate?

    And are you saying you like the deductibility, but think one of those options would be even better?

  28. comment number 28 by: AMTbuff

    Yes to all 3.

    I think B-S recommended a tax credit of 15% of the gift amount. Personally I think 25% is needed if you want to make it an incentive to give money you wouldn’t otherwise give. At less than 25% you might as well make it 0%.

  29. comment number 29 by: Brooks / Gordon

    AMT,

    I’m asking you (1) if you think tax deductibility of charitable contributions is a good thing, and (2) if/why you consider a tax credit or a “matching grant” better.

  30. comment number 30 by: Vivian Darkbloom

    “I think 25% is needed if you want to make it an incentive to give money you wouldn’t otherwise give.”

    The same is generally true of any other subsidy. If the investment is worth making or the charity is worth supporting, why do they need/deserve a subsidy? The only valid conclusion from this statement is that any subsidy needs to be *lower* than 25 percent and zero would be best.

    From the progressive side there is a real disconnect here. On the one hand, (effective) tax rates are not supposed to influence economic behavior, at least for the “rich”. If higher effective marginal tax rates are not supposed to influence investment, why the heck would they influence charitable giving?

    As I wrote before, “charity” is one of our biggest tax shelters and the influence on the deficit is, per nominal dollar “given” and deducted, much greater than other tax expenditure subsidies, such as the mortgage interest deduction. First, much of that charitable giving is parked in endowment fund, the earnings on which indefinitely escape income tax (sales tax, estate tax, etc). When the money is spent, if ever, much of it is spent abroad, and that which is not is not driving much, if any, job creation, other than the folks who are running the “business”. To a large extent, it’s a huge scam.

    But, the R’s are as much to blame for this situation, in particular the “faith based” initiatives of Bush.

    Time to give Obama what he wants as stated in the budget. Severe restrictions on tax expenditures for the “rich”, including charitable contributions. It is utter hypocrisy to now bombard the media with the idea that restricting itemized deductions will hurt charitable giving, when the whole idea of doing so was Obama’s in the first place.

    Where is the media on this story? Where is the TPC when they are really needed? Having done Romney in and any real chance for tax reform, they are completely silent on this BS. Economist Mom, too. I’ve lost all faith in the so-called “non-partisanship” of our supposedly non-partisan tax policy and budget policy centers. But, then again, many of the folks running those joints are in the “rich” league solely because of the tax subsidies that support them. So, why would they advocate doing away with the subsidies that allow them exist? Advocating a couple of percentage point increase in their marginal tax rate is a small price to pay for turning the other way. This is regulatory capture at its worst.

  31. comment number 31 by: Vivian Darkbloom

    “one could say that a very substantial reduction in the deductibility of charitable contributions would be like imposing a substantial tax falling heavily on many poor and other non-rich people, and would violate the core principle of Obama’s revenue-raising effort (progressivity).”

    Really? Are you buying that “one could say” argument?

    Actually, it’s very likely dfthe other way around. “One could say” that for every dollar that the “rich” are able to avoid in income (and estate and sales) tax on their charitable deductions, someone else needs to pony up. Guess who? I suppose you might be thinking that if a “rich” person donates $1 to charity and saves 44 cents in federal tax (with state tax it may be well over 50 percent), the “poor” and other “non-rich” get a net benefit of 56 cents. I think you need to shave off a considerable amount from the 56 cents to account for the following:

    1. Much of that money donated is spent to fund the salaries and benefits of not-so-badly-paid administrators;

    2. Much of that money doesn’t really get spent on “the poor”, but on stuff other “rich” folks, “upper middle class” and “middle class” folks like to enjoy (exactly where does it say in the tax code that “charitable giving” needs to benefit exclusively the poor?)

    3. A not inconsiderable amount of that charitable giving (after “expenses” of course) is spent on the “poor” outside the US.

    I’d like to see the “math” as to how this charitable giving, net, net, really does benefit the “poor” or even the “non-rich” in the United States.

  32. comment number 32 by: Vivian Darkbloom

    Regarding the amount of US charitable contributions that are spent on projects abroad, Judge Posner wrote in 2009:

    “Of some $300 billion in annual American charitable giving, about 5 percent is spent abroad; almost 40 percent of that 5 percent is donated by the Bill & Melinda Gates Foundation, mainly for trying to alleviate Third World health problems (such as malaria and AIDS) and provide assistance to Third World agriculture.”

    http://www.becker-posner-blog.com/2009/03/tax-deductions-for-american-charitable-donations-abroad–posner.html

    I recall that the Bill and Melinda Gates Foundation is the destination for Warren Buffet’s billions. Sure, these are fine initiatives. I hope it helps to alleviate problems of the poor in Africa and elsewhere. But, the point is, why should the US taxpayer subsidize this? For every dollar of revenue (income and estate tax ) that Warren Buffet, Bill Gates and others in their league avoid by giving to help the poor abroad, the “non-rich” in the US, including the US poor, end up picking up a substantial part of the bill.

    It’s actually rather ironic that Buffett is arguing that he should pay a higher share of income taxes. In reality, allowing him to avoid tax on his income and his wealth ends up as a tax on the *US* poor and non-rich. I’ve never heard him advocate eliminating the charitable deduction—have you?

  33. comment number 33 by: Brooks / Gordon

    Vivian,

    You respond to my point “one could say that a very substantial reduction in the deductibility of charitable contributions would be like imposing a substantial tax falling heavily on many poor and other non-rich people, and would violate the core principle of Obama’s revenue-raising effort (progressivity)” by asking rhetorically:

    Really? Are you buying that “one could say” argument?

    I think it’s a reasonable perspective.

    In arguing to the contrary, you point out that the rich paying less in taxes due to deductibility of philanthropy is probably regressive because non-rich have to pay more in taxes to offset that forgone revenue. While that’s a worthwhile consideration, I think you’re overstating the implication when you say the overall effect is probably the opposite. Much of the incidence (if that term is correct to use here) of this tax change would fall on non-rich, including many poor and near poor, beneficiaries, and a large portion of beneficiaries, I presume, pay little/no income taxes. And overall, my sense is that large cuts in deductibility wouldn’t be regressive (rich vs. non-rich, and certainly not rich vs. poor), but that depends, I suppose, on the behavioral effect: If rich people use all of the deductibility to give that much more with a given after-tax loss of wealth to them, then I would think the deductibility is progressive (and cutting the deductibility regressive). If, at the opposite extreme, the rich were to generally decide to donate a given amount regardless of whether or not it is deductible, and just pocket any deductibility, then that would be quite different, and I think your assertion would then be valid (the deductibility wouldn’t be generating any incremental philanthropy, but would reduce tax liabilities regressively). But my assumption is that the reality is closer to the former scenario.

    Next, you present arguments for discounting the value of such philanthropy:

    1. Much of that money donated is spent to fund the salaries and benefits of not-so-badly-paid administrators.

    Well, as I pointed out, one reasonable perspective is that deductibility is, in effect, a choice we’ve made to engage in philanthropy via private sector actors and their choices rather than having this done through the political process and via government bureaucracy. I’ll go out on a limb and assume you don’t presume that the public sector is more efficient overall in terms of utility generated per dollar.

    2. Much of that money doesn’t really get spent on “the poor”, but on stuff other “rich” folks, “upper middle class” and “middle class” folks like to enjoy (exactly where does it say in the tax code that “charitable giving” needs to benefit exclusively the poor?)

    Yes, of course some philanthropy benefits non-poor. But even then it is progressive, with the rich contributing much more relative to their usage (e.g., visits to the museum) than do the non-rich.

    3. A not inconsiderable amount of that charitable giving (after “expenses” of course) is spent on the “poor” outside the US.

    And you add later:

    why should the US taxpayer subsidize this?

    First, per the data you later supplied (which I appreciate), only 5% is spent abroad. But moreover, so what? Again, one can reasonably view private sector philanthropy — or more precisely the incremental amount of it induced by deductibility – as an implicit choice we have made, in aggregate, regarding the rough level and nature of wealth redistribution (in cash, services, whatever), and we have just chosen to let private actors allocate the funds (each on an individual level) and private actors implement it, rather than allocating via the political process and having government bureaucrats implement it. Do you presume we, as a people, wouldn’t want to give to help poor people (and others) abroad? I assume that is not a premise you hold. So, from the above perspective, it’s either asking taxpayers collectively to subsidize private actors doing this or asking taxpayers to pay for it via taxes for politicians and bureaucrats to do it.

    Just to elaborate on the effects of a very substantial cut in charitable deductibility, even if we assume, for the sake of argument, that it’s either we subsidize the private sector (via taxpayer matching funds, in effect) or we just tax and spend via politics and government, beneficiaries would likely still get hurt badly. First, even if phased in over several years, it would likely be severely disruptive, meaning that at least during a long transition period the level and/or types of wealth redistribution in question would be suboptimal relative to the wishes of Americans (or if you prefer, taxpayers) in aggregate. Second, people may not be willing to be as philanthropic through taxes, politicians and government as they would through personal philanthropic choices (providing greater emotional satisfaction and reflecting personal priorities) and through entities they may regard as more cost-effective, so overall philanthropy may be less (harming would-be beneficiaries) and suboptimal by forcing it through politics and government.

    Thank you for researching and finding that 5% figure. If you’re familiar with the Becker-Posner blog where you found it and to which you link, you know that the format is that they each opine on each topic, often/usually with significantly different points, perspectives, opinions and preferences (It’s a great blog). You linked to Posner’s post. A link there takes one to Becker’s take on it, where he makes some of the points I’ve been making http://www.becker-posner-blog.com/2009/03/american-charitable-deductions-abroad-becker.html. An excerpt:

    Another important rationale for tax exemption of charitable contributions is to decentralize giving away from the government and toward the private sector. Just as government grants to hospitals and other beneficiaries crowd out giving to these beneficiaries by private foundations and religious organizations, so too does private giving reduce the need for government giving. For example, when private universities obtain support from wealthy individuals and foundations, this allows them to compete more strongly against public universities, and thus reduces the need for as much public funding of higher education. This “crowding” out of government giving may be valuable because private donations are generally better thought out and more efficient than public grants and aid. Both arguments seem to apply rather fully to giving to foreign charities as well as to domestic ones. Private giving to help foreign hospitals, doctors, schools, or individuals reduces the need for foreign aid by the US government to the same type of organizations and individuals. This is preferable because government foreign aid invariably goes through other governments, and hence tends to be centrally controlled, and subject to government inefficiencies and corruption. Private giving is more effective at getting the assistance to those who need it.

  34. comment number 34 by: Vivian Darkbloom

    “Much of the incidence (if that term is correct to use here) of this tax change would fall on non-rich, including many poor and near poor, beneficiaries, and a large portion of beneficiaries, I presume, pay little/no income taxes.”

    But, I thought you recently helped point out the fact that taxes and deficits are fungible. Many “poor and near-poor” pay payroll taxes, sales taxes, property taxes, etc. to the extent the “lost” revenue from these subsidies is borrowed, they equally suffer the longer-term ill effects through either future taxation, inflation, etc. Despite all this, some of those poor and near poor graduate to the ranks of bona fide federal income tax payers at some point in their lives. Just think of how much more money the federal government could spend, based on real targeting to the needs of the actual poor, if the “spending” via these subsidies was redirected through the government. I guess it’s not enough that the government seems to think they need to spend needlessly on the non-poor, they make it a policy to subsidize private organizations that do the same. I like opera, too, but I hardly think the tax subsidies on contributions to the Met are benefitting any homeless people. Also, as pointed out earlier in this thread, the definition of “not-for-profit” organizations is overly broad in the first place (e.g; NCAA, AARP, etc). We could, of course, try to scale back that definition so only organizations that actually help the “poor” and the “nearly poor” get the subsidy, but I trust you will realize this is a slippery proposition. I’d be in favor of curtailing the definitions under section 501. Let’s by all means do that, but I suggest a more immediate solution would be to scale back across the board.

    “that depends, I suppose, on the behavioral effect: If rich people use all of the deductibility to give that much more with a given after-tax loss of wealth to them, then I would think the deductibility is progressive”

    Studies on the behavioral effect vary. Some don’t think that the tax subsidy makes a big difference in the level of giving. There actually may be truly altruistic people out there. But, this only demonstrates the point about the cost of those subsidies. How much of that tax subsidy is actually “wasted”? If Mr. multi-billionaire has his mind set to give $50 billion to the Gates Foundation, then any tax subsidy to that person is not needed. The tax subsidy is, in a way, a “matching contribution” by the government paid for by the rest of us. Again, I don’t necessarily want Mr. Buffett or anyone else deciding who I am going to give my tax dollars to. There is an electoral process for the latter. While you admit this possibility in your response, it strikes me that your “assumption” is that the majority of folks give only because of the subsidy. Regardless of the percent of persons who would give absent a subsidy, I think you’ve got to admit a good portion of that subsidy is not needed to encourage giving and is therefore “wasted”.

    “I’ll go out on a limb and assume you don’t presume that the public sector is more efficient overall in terms of utility generated per dollar.”

    I hope you didn’t climb too high into that tree. In fact, I doubt very much that the private non-profit sector is any more efficient than the average government operation. Why should they be? They suffer from the same lack of incentives that real profit motive and market forces provide and they are likely not much more answerable to their donors than the government is. The government at least has better economies of scale. As far as salaries are concerned, check this out:

    http://nccsdataweb.urban.org/NCCS/extracts/nonprofitalmanacflyerpdf.pdf

    Per that study, non-profit wages increased 29 percent over the past year versus 23 percent for government and minus 1 percent for business. Employment in that sector increased 17 percent versus 8 percent for government and minus 6 percent for business. If you’ve got some time, check out some Forms 990 on compensation levels. The folks running these shops and the mid-level employees are very often making much more than government counterparts. (I hope you appreciate the irony here: we need a non-profit to keep track of the non-profits).

    “…one can reasonably view private sector philanthropy — or more precisely the incremental amount of it induced by deductibility – as an implicit choice we have made, in aggregate, regarding the rough level and nature of wealth redistribution (in cash, services, whatever), and we have just chosen to let private actors allocate the funds (each on an individual level) and private actors implement it, rather than allocating via the political process and having government bureaucrats implement it.”

    “Implicit” with a capital I and several huge bold-print asterisks. Realistically, I would think that less than 0.1 percent of the American public has any idea, even in the remote regions of their sub-conscious minds, of the extent to which tax dollars are allocated to these subsidies and what those subsidies end up financing. That’s the beauty of running spending through the tax code—the obfuscation is so great nobody can keep track of it. Keeping an eye on direct government expenditures is hard enough, but it’s much easier to track that, and an informed electoral response is much better. If you think people are implicitly approving this, why wouldn’t it be better to explicitly approve the same?

    Regarding Professor Becker, he does, of course, have a Nobel. But, a lot of Nobel prize winners have been wrong on a lot of things, particularly things outside their direct area of expertise. Becker makes a string of plausible arguments for charitable giving, but actually doesn’t provide any back up for any of it. In particular, while there may be good reasons to encourage charitable giving, he’s not made the argument that this encouragement should extend to an extremely generous “tax subsidy”. The argument is also overly idealistic. It seems to presume that the bulk of tax-subsidized private giving and non-profit spending matches his example of university financing. I’m skeptical about that example to begin with, but what is the AARP crowding out?

    For a good example of how well the “crowding out” that Becker refers to works just consider our messed-up health care system.

    The last sentence you quote from Becker is: “Private giving is more effective at getting the assistance to those who need it”. Again, this is idealistic and vastly overbroad. I wonder, just what percentage of those donations actually are aimed at “getting assistance to those who need it” in the first place? A small percentage, I think.

  35. comment number 35 by: Brooks / Gordon

    Vivian,

    Some of the points you make are reasonable considerations (at least as directional factors, whether or not they suffice for your conclusions), and some less so. I may comment further later, but for now I just wanted to address one point quickly:

    While you admit this possibility in your response, it strikes me that your “assumption” is that the majority of folks give only because of the subsidy.

    Why would you get that odd impression? I implied no such thing, and of course people would give without a subsidy. I first explained that, at one extreme we have a scenario in which people think purely in terms of how much they are willing to sacrifice (of their wealth), and the effect of the subsidy is then to simply add to the amount they give such that the after-tax amount equals that amount of personal sacrifice, and at the other extreme scenario people decide how much they want to give and just pocket any subsidy. I then noted that in the latter scenario, the subsidy would indeed be wasted (because it doesn’t induce any incremental giving), per your perspective, but in the former scenario that doesn’t hold. And I said that my assumption is that the reality is close to the former scenario.

    My assumption isn’t based on any data or anything else other than (1) my sense that, particularly among the “rich”, such decisions are made closer to rationally than to irrationally, and (2) my view that, generally, the (more) rational approach is to decide how much one is willing to sacrifice for causes one wishes to help rather than to just choose a dollar figure to give regardless of what personal financial sacrifice that implies. So I think the reality, overall, is closer to individuals thinking “I’m willing to sacrifice $100k, so I’ll donate $150k, knowing that the deductibility implies that I’ll sacrifice $100k.”

    I think in some cases people do instead simply choose a donation dollar figure, and in many cases it may be between the two, but again, overall, I think the reasoning of the decision is much closer to the sacrifice-based choice rather than a giving amount-based choice regardless of implication for the amount of financial sacrifice.