The Legacy of a Pioneering Scholar on Charitable Giving

The death of Martin Feldstein, a Harvard economist, drew plenty of attention to his many accomplishments: He chaired President Reagan’s Council of Economic Advisers, directed the National Bureau of Economic Research for nearly three decades, was a prolific contributor to both scholarly journals and newspapers, such as the Wall Street Journal, and taught numerous students who have themselves held high-level government and academic positions, such as former Treasury secretary and Harvard president, Lawrence Summers, and global-development expert, Jeffrey Sachs.

But less well remembered — indeed, hardly mentioned in obituaries in major publications — is how he transformed research on charitable giving. Debates about the impact on philanthropy of changes in tax policy, such as the Tax Cut and Jobs Act of 2017, are still conducted using ideas and methods Feldstein pioneered over four decades ago.

In 1917, the War Revenue Act made gifts to charity deductible from taxable income. The aim was to encourage philanthropy, especially for humanitarian aid during World War I, but the effect of the provision was limited, since only the wealthiest households had to pay income taxes. That remained the case until the World War II, when the number of people filing tax returns rose substantially. To simplify administration, Congress allowed taxpayers to take a standard deduction rather than listing – “itemizing” – their gifts to charity or other things that they could write off. Churches, synagogues, and other houses of worship as well as many nonprofits objected vehemently, fearing a decline in philanthropy. After all, it would no long matter how much you gave if you took the standard deduction — your taxes would end up the same.

At the time and for many years after, no one knew how this or other measures, such as different tax rates (which affect the amount taxpayers can save by taking deductions), affect giving. Tax policy toward philanthropy was chiefly the concern of law professors, who focused mostly on the rationales and methods for favoring giving in a supposedly progressive tax system, or the costs of the charitable (and other) deductions to the federal government. Despite a decade of congressional investigations of philanthropy in the 1960s, followed by a major revision of the laws governing it in 1969, research on how public policy influenced foundations and individual donors was scarce.

That changed with the creation of the Commission on Private Philanthropy and Public Needs in the early 1970s. More commonly known as the Filer Commission after its chairman, insurance executive John Filer, it was meant as a response by nonprofit leaders to what they viewed as the previous decade’s political setbacks when Congress passed tighter regulations on charities and foundations. Its 1975 report, Giving in America, left few lasting marks, but its background studies, filling six thick volumes, allowed scholars to apply a variety of disciplines to examining philanthropy. They laid the groundwork for what has now become a worldwide research infrastructure of considerable size.

Feldstein, not long removed from his own graduate education, served as a special consultant to the commission. Together with several co-authors, he contributed four econometric studies, analyzing empirically how tax policies affected individual and bequest giving. What was notable about these studies is that they relied on large sets of data about American households, compiled by the Treasury Department and other government agencies, as well as the Filer Commission itself. They also applied a concept long familiar to economists – “elasticity,” or the change in one variable in relation to the change in another – to assess how taxes affected philanthropy. Feldstein and his colleagues concluded that tax incentives could encourage donations but didn’t have a major impact. For example, reducing the value of the deduction for donations would decrease the amount households contribute by just a little.

Since the Filer Commission was created to identify government policies to stimulate more philanthropy, this finding seems to have been unexpected. As a result, it asked a professor at the University of Chicago’s business school to review the work, paying attention to whether the methods and data used were “appropriate” and the conclusions “justified.” He wrote that while “all findings are not as precise or as final as one would like,” the research provided “much that is valuable” and reduced “the range of uncertainty about the relationship of charitable giving and its determinants.” Feldstein and his associates, he added, deserved to be congratulated.

Since the early 1970s, numerous studies have sought to copy Feldstein’s research using different data, methods, and policy changes. Some have tested more complex theories about why people donate, incorporating emotional responses, such as a “warm, fuzzy glow” that people get after they give, or demographic features, such as gender, along with economic calculations. Although they have sometimes produced higher estimates and sometimes lower ones, the conclusions Feldstein and his colleagues reached four decades ago remain within the bounds of acceptability.

With the imminent publication of “Giving USA’s” estimates of charitable giving in 2018, the debate over the impact of tax changes on philanthropy is about to resume. Interest groups such as Independent Sector, relying on the kind of research Feldstein pioneered, have argued that by doubling the standard deduction, the Trump administration’s tax bill would so greatly diminish the number of households claiming deductions for their gifts that individual philanthropy would decline significantly, perhaps by as much as 6.5 percent from 2017. Others were more sanguine about philanthropy’s prospects, focusing on the uncertainties of knowing how those who had previously deducted their gifts would react to not being able to do so. Since more than one year may be necessary to see the full effects of raising the standard deduction, the 2018 giving figures will not settle this dispute.

Although Martin Feldstein was generally supportive of the 2017 bill, it does not appear that he commented publicly on how he thought it might affect philanthropy. (He had criticized an Obama administration proposal to limit how much upper-income households can deduct for their donations.) More than most, perhaps, he understood the difficulties of calculating precisely how much proposed tax policies — especially ones as complex as the Trump administration’s — would reduce or encourage giving. But because of his work in bringing more rigorous, analytic approaches to bear on philanthropy, we are better equipped to understand what is happening.

Leslie Lenkowsky is an Indiana University expert on philanthropy and public affairs and a regular Chronicle contributor.