Tax Law and Human Nature - A Social Experiment

I think that, very soon, there's going to be an interesting opportunity to have a look at a fundamental human virtue. Based on a change in circumstance to tax law, of all things, it may be possible to catch a glimpse at just how charitable we are as a population. ​

A few days ago, I was thinking about the new tax law and how it might affect people. Lots of folks have written volumes on this already. For example, the new tax law will depress housing prices in high-tax states, as there is a new cap on state- and local tax deductions (the latter mainly being in the form of property taxes). This makes the home less of a tax break and, presumably, less valuable. Hence the predicted depreciation. 

This should surprise no one who has ever read Freakonomics, a book based around the premise that people respond to incentives. The flip side of that is that people respond adversely to disincentives. This rule may be tested under this new tax law in a very interesting way. 

A different section of the new tax law will double the standard deduction from about $6,000 to $12,000. While this will increase the average salary(wo)man's paycheck, it will also affect how we file taxes. For many people, the increased standard deduction will mean the end of itemized deductions, as it is increasingly unlikely that those expenses we are legally allowed to deduct will exceed the standard amount everyone gets. And while deductible expenses includes property taxes and mortgage interest, charitable contributions are also a deductible expense. Unless you have a very high income, you are now less likely to have a tax break from your charitable contributions. 

This is a new situation for the average Joe. Not for the ultra-rich, who will itemize until the sun dies, but the GOP tax plan has moved the cheese as far as incentives are concerned. I predict there will be an effect, although I can't quite predict the extent of it. Since it is a well-known fact that average income people are more charitably generous (as a percentage of their income) than their better-heeled counterparts and since we know that tax incentives are depended on more by the middle class, this new law MIGHT give us a glimpse into how naturally generous people are when the financial incentive is removed. 

My prediction: in the first year of the new tax plan, we won't see much of a change. People aren't usually too savvy on the ins and outs of tax law, after all. However, after getting a little surprise around April, 2019, I think we'll see a modest-to-moderate fallout in giving from the middle quartiles of economic strata, after people realize that their contributions are no longer rewarded. Being able to awkwardly humble-brag on social media about helping homeless probably won't cut it; those 'likes' don't pay them bills. Hey, I'm a pessimist. But to keep our eye on the ball, what an opportunity to evaluate just how generous we fundamentally are, when altruism is left unrewarded. We like to THINK we're generous, but this could be a true test. What a fascinating little window to look through.                                       

A slightly different, though related, ramification of this tax break is the use of the extra income by the average consumer. Make no mistake - this bill WILL put money in the average person's pocket. Will the extra $1,500 or so in our pocket find its way into charitable coffers, or will people treat it as found money? Will we spend it (this is probably the hope of govt), save it, pay down debt? My guess: the politicians will get their wish. This Washington Post article documents the plummeting savings rates of Americans of late. We not a bright people; once we forget a recession, we spend like there's no tomorrow. It's a cyclical process, one that suggests there's a good chance we're near the end of the current economic boom. 

So enjoy spending your tax break on magic beans before winter comes.