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.