One thing students in public finance courses learn is that who you levy a tax on isn’t always the person who pays the tax. For example, suppose you place a per unit tax on hamburgers and make the burger restaurant responsible with paying the tax. What does the burger restaurant do? Raise its price by $1. But does that mean the consumer pays the full burden? No. Why? People will consume fewer burgers. As such the $1 tax is actually split between the restaurant and the consumer. The exact level of the split is determined by the elasticities of supply and demand with respect to price.
In regards to Obama’s proposal to limit the deductibility of charitable giving Martin Feldstein makes essentially the same point,
President Obama’s proposal to limit the tax deductibility of charitable contributions would effectively transfer more than $7 billion a year from the nation’s charitable institutions to the federal government. But the high-income taxpayers affected by the rule change are likely to cut their charitable giving by as much as the increase in their tax bills, which would, ironically, leave their remaining income and personal consumption unchanged.
In other words, it wont be the rich who pay the taxes, even though they have the statutory burden, it will be the charities and those these charties help that will be bearing the burden.
The proposed tax change would apply to married couples with incomes of more than $250,000 (and single people with incomes greater than $200,000). Under current law, such couples can deduct the value of their charitable gifts from their taxable income. While no one makes a charitable contribution to get a tax deduction, the deductibility of charitable gifts reduces the cost of giving and therefore increases the amount that individuals give.
Well, that looks like it is more of the “tax the rich” thinking. I think it is time for somebody to tell Obama his staff is doing it wrong.
This is where things get interesting: If the 10 percent increase in the cost of giving caused the person to reduce his gift by 10 percent, to $9,000, his tax savings would be 28 percent of $9,000, or $2,520. The government’s revenue loss would be reduced by $980 (from $3,500 to $2,520). The person’s gift to the university would be reduced by $1,000, almost the same amount. Since this high-income person would pay $980 more in taxes but give away $1,000 less, he would end up with an extra $20 for personal consumption.
Via Greg Mankiw.