The death of Harvard Economist, Martin Feldstein, drew plenty of attention to his accomplishments: chairing President Reagan’s Council of Economic Advisers, directing the National Bureau of Economic Research for decades, as well as teaching students who went on to very high-level careers.
But less well remembered – indeed, hardly mentioned in his obituaries – 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 more than 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 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 longer 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.