Thursday, December 06, 2012

 

Fiscal Cliff Diving


I have to admit finding the “fiscal cliff” debate a little bit silly, given that the “cliff” in question is entirely artificial.  But if you start pulling that thread, it’s not clear where it ends.  And even if the cliff is a figment of the collective political imagination, the harm that cliff-driven decisions could do is very real.  If you swerve your car to avoid the unicorn you’re hallucinating, the tree you crash into isn’t a hallucination, and the damage done is real and potentially terrible.  

Apparently, one of the possible consequences of the latest “cliff” debate would be to put a cap on charitable deductions.  Conceivably, that cap could put a severe dent in higher ed philanthropy.

This piece from Business Week, of all places, does a nice job of surveying the philanthropic landscape for higher education.  Broadly speaking -- and yes, there are praiseworthy exceptions -- the largest donations tend to go to the wealthiest schools with the wealthiest and best connected students.  And even there, the bulk of the money comes from a small group of high rollers.  (The article claims that at Colgate, 90 percent of the money comes from 10 percent of the donors.)  Folks with that much money tend to be quite savvy about it, and they plan their giving with full awareness of the tax implications.  If those tax implications change, their giving may change.

Reading that, it was hard not to be struck by the gap between politics and economics.

Most undergrads in America go to colleges at which philanthropy is a relatively small part of the operating budget.  (For present purposes, I’ll define philanthropy to include the interest income thrown off from endowments.)  Most donors to higher education give smallish amounts of money.  The major sources of income at most community colleges and four-year public colleges are tuition/fees and state (and sometimes local) government support.  Philanthropy comprises a hefty chunk of the operating budget only in a rarefied tier of institutions.

But at the top end of the prestige hierarchy -- the part that gets the most coverage -- a smallish number of megadonors exert tremendous influence.  One major outcome of that influence is to ensure that the prestige hierarchy remains exactly as it is now.

The philanthropic impulse is praiseworthy and worth encouraging; I’d hate to see the tax deduction for charitable contributions just go away.  

But I wouldn’t necessarily mind if the discussions occasioned by the fiscal cliff started steering policy in a different direction.

At one level, obviously, this is really about income polarization, which is a much larger issue.  But it’s also about aspiration.  People don’t generally donate because of perceived need; they donate to be part of something they consider successful and admirable.  That’s why development offices love to tell success stories.  

Put differently, that’s why it’s important to maintain tax deductions for middle-class givers (and tuition payers).  Once you lose the middle class, and an institution becomes identified in the public mind as intended only for the poor, then the institution gets kicked to the political curb.  In the public mind, poverty equates to failure.  The way to get support is to show success, and it’s easier to have success when you have support.  Put up a barrier to that support -- say, by taking away a tax deduction -- and you could start an unfortunate dynamic.

But if rates on the wealthy were to increase, and some of that revenue used to help shore up the lower-cost institutions, then we could reap the best of both worlds.  Higher rates would increase the relative worth of deductions -- the higher your tax rate, the more a given deduction pays you -- and a more realistic and predictable funding stream for community colleges and four-year colleges would make possible the kind of success that tends to draw voluntary private money.  Let’s not lose the forest for the trees here.  We could get a virtuous cycle going if we do this right.

The fiscal cliff may be silly, but the opportunity it presents isn’t.  Here’s hoping that we don’t get distracted by political unicorns.

Comments:
I don't know where you got the idea that going over the cliff is imaginary, but you're very wrong. It would be catastrophic, a huge cut in spending and rise in taxes, the exact opposite of stimulus, at a time when it will do real damage. Any macroeconomist can tell you the effects would be very real and very negative.
 
What Anonymous said:
It may be "artificial", but only in the sense that every law (from speeding to murder) is a social invention. It is a law, and the time bomb Republicans forced us to put under our collective beds will go off if the law is not changed.

What puzzles me is why you single out the Romney proposal for discussion. Romney is not the President and, AFAIK, what you describe is not part of the bill that was passed by the Senate several months ago and merely awaits a public vote in the House.

Raising the effective tax rate on people in Romney's situation (what used to be called the idle rich) should encourage charitable giving if deductions are left as they are under previous and current law.

I'm conflicted about the "cliff". Would it be good if Tea Party folks saw their Medicare cut and realized it comes from the Federal Government? Would it be good if your local "private" defense industry employer shut down, and you realized that is also the Federal Government? Many people do have no clue ...
 
No, it wouldn't be good if the local defense industry shut down because that's where my spouse is employed. We are in the hub of all things defense in the living in the shadow of the capitol (doesn't that sound all "Hunger Games"?).

He's worried about the fiscal cliff and what it means for DOD contracts and such. Even though I work for PubU, we only receive 10% of our funding from the state and gather the rest ourselves through various sources some of which is philanthropy.
 
Would it be good if Tea Party folks saw their Medicare cut and realized it comes from the Federal Government?

No – and don’t touch their Social Security either.

These are the same people who stand around with signs that say “Keep the Government out of my Medicare” without the slightest hint of irony.

Most Tea Partiers would be very pleased with the Chinese health care system where there is little or no insurance, no meaningful government safetynet and people pay for services as they are rendered. People in China die because of substandard care, medical errors, (due to lack of regulations/oversight) and refusal (on the part of health care workers) to provide care to those who can’t pay. A single illness can destroy a family. Go Free Market!

Having been paid with IOUs when California couldn’t sort out its budget, I can’t help but wonder what would happened if seniors were paid with IOUs while the feds sorted this out. Seems like everyone should have a little taste of California Crazy right after the holidays.

 
Phillanthropic giving is more of a concern in k-12

http://parentsunitedphila.com/2012/12/06/public-deserves-to-know/

"On a national level, a number of education observers and public interest advocates have raised serious concerns about the role of “philanthropic” investments into education reform. From the Broad Foundation to the Waltons and Gates Foundations – what we’re seeing across the country is an unprecedented level of private money shaping public policy under the guise of philanthropy. Too often that agenda has centered around a radical dismantling of public education, increased privatization, and disruptive reform that has sent many districts spiraling into chaos and sustained turmoil."

Hopefully, there will be enough push back in k-12 so that Walton/Gates/Broad don't start looking at higher ed to disrupt.
 
Wait, I thought that Austerity would solve everything, just like it did in Greece?

 
Anonymous@6:38AM -
I understand your concern, but maybe you didn't vote to keep a Tea Party congressman in office who has voted repeatedly to send us over the cliff. That cannot be said of several districts I know about that are heavily dependent on the programs that will be sequestered. They seem to think they work for a private company where money grows on trees.

Ivory -
I get your point, but I actually know some Tea Party folks and they most definitely do not want free market health care. One actually insists that Medicare must be continued and that it is not a federal program supported by income taxes and borrowing. He thinks his modest monthly payment covers all of it.
 
Following up on MPledger's point, why are those mega-foundations created to foster the policy preferences of their founders tax-exempt? Why should Buffett get an unlimited charitable deduction so he gets to direct what part of the government functions his fortune supports?

I'll believe that politicians are serious about taxing the rich when they go after the real pots of money out there. Those are the mega-foundations that are operating entirely outside the tax system, and the tax-free muni bonds used by the wealthy to legally bring their income tax down to zero. The rest of this is just smoke for our entertainment.
 
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