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A Painful Tax Break

By Nancy F. Bauer

If current econometric models are to be believed, there is now one fewer reason to give to the charity of your choice. While a potential philanthropist can still count on his key ring, totebag, umbrella, and peace of mind in exchange for a portion of his checking account, President Reagan's recently enacted tax-cut package has made something of a mockery of that well-worn sales pitch: "And, remember, your contribution is tax deductible." According to the latest round of economic fortune-telling, the millionaire's response to that old tease is about to become, 'So what?"

Before Reaganomics, the phrase "tax deductible" struck a chord in the hearts (and wallets) of upper-income-bracket Americans. It encouraged them to depart with sizable--and non-taxable--chunks of their assets (and thereby do their part to benefit humanity) since the only other option was to donate many of their taxable dollars to Uncle Sam. Things are different now. The new tax laws make it less attractive for wealthy (and some not-so-wealthy) people to give their money away. They might as well hold onto it, since the federal government isn't taking so much in taxes anymore.

Meanwhile, Harvard University is trying to raise $250 million by October of 1984. Less than two years into the five-year capital fund drive, the Harvard Campaign has already coaxed $153.6 million from foundations, corporations and--primarily--individuals. "This campaign is extremely successful. We're underway. We have a head of steam," enthuses Michael T. Bolan, the University's director of planned giving.

But the early topping of the Campaign's financial half-way mark a few months ago coincided with the disheartening news that tax cuts could well curtain the flow of free money to University coffers. So now the future of the Campaign boils down to questions of momentum versus questions of economic disincentives. Everything depends on which phenomenon supercedes the other.

Fund drive strategists insist they're approaching the coming months with "cautious optimism," which probably means that they don't know what to expect but hope for the best. Economists, on the other hand, are boldly asserting--in such places as the front of The New York Times--that institutions depending on donations from the private sector are about to be hit by drastic income reductions.

One of the most recent gloom-and-doom predictions came from the Urban Institute in Washington. It was built on groundbreaking studies conducted by Martin S. Feldstein '61, professor of Economics and director of the National Bureau of Economic Research. Institute economists calculated that individual donations to institutions should drop many billions of dollars lower between 1981 and 1984 than they might have been under the old tax laws.

Economists blame these dreary figures primarily on two provisions in the new tax bill, the Economic Recovery Tax Act. First, the reduction of the maximum individual tax rate means that the country's most wealthy citizens may now keep half of every dollar they make instead of just 30 cents. Second, the maximum rate on long-term capital gains taxes has dropped. That means that when the value of a person's stock increases, for example, he will be able to keep more of the gain. And all that means that people will probably be less inclined to skirt taxes by forking their money over to Harvard.

In the weeks since President Reagan's tax plan has become law, though, Harvard development officials like Boland have been working to come up with their own predictions. Having completed an internal study of the dilemma just last week, they say they are convinced that studies such as the Urban Institute's overlook other key factors. According to Thomas M. Reardon, the University's director of development, the first oversight is economic: Just as taxes will go down, so disposable income will rise. Especially in the 50-per-cent-and-under tax brackets, Reardon insists, this bank balance boost will offset the higher "cost" of contributing to Harvard.

But Charles T. Clotfelter, co-author of the Urban Institute's study and an associate professor of public-policy studies and economics at Duke University, counters Reardon's logic with the assertion that his model takes disposable income into account. "It does moderate the decrease, but the [cost] effect overwhelms that," he says flatly, explaining that the study relied on a decade's worth of data that consistently show contributors are far more sensitive to changes in tax structure than to fluctuations in their disposable income.

Harvard's internal study shows otherwise. Calling the forthcoming rise in disposable income in the upper tax brackets "perfectly enormous," Boland also insists that, in the huge 50 per cent and under tax categories, the "cost" of giving to Harvard should rise by way less than $100 per every $1000 donated. It may even drop in some lower brackets, which will actually feel incentives from the new tax laws. Boland says that the frightening econometric models receiving a lot of press are too general to apply to Harvard; his goal is to bring what he considers more relevant data to Harvard's potential benefactors. "I think we have to say to them that they may have gotten an idea that is drastically overblown and by inference transferred that to the Harvard Campaign. Somehow," he adds, "we have to carry the results of our study to our alumni."

And here, fund drive officials say, is where the momentum factor comes in. Because Harvard is currently conducting a special appeal for funds, it may use its elaborate solicitation mechanism, which includes 4000 alumni volunteers, to convince the other 53,000 Harvard graduates that, contrary to popular belief, they can still afford part of an endowed chair. This fall, for example, when solicitation efforts will be targeted on New York and other mid-Atlantic states, the standard pleas will be augmented by a brief explanation of the development office's internal study of the new tax law. "They'll throw in a couple of lines," says Richard B. Boardman, director of special ($5000 to $100,000) gifts. "And if an alumnus is concerned, we're very much prepared to pull out the charts."

Gifts from individuals should account for the vast majority of funds accruing from this drive. But the officials who head up the search for corporate and foundation money say they, too, will redouble their efforts to convince these sources that Harvard is still a good investment regardless of current tax laws. Beverly Bennett, director of foundations and development services for the Campaign, says that as other sources of funding dry up and as more institutions turn to foundations for help, Harvard may have an edge on its competitors because of already ongoing Campaign efforts. "I'm not panicked at all," she adds.

Similarly, Thomas W. Stephenson, the new director of corporate gifts for the Campaign, foresees a continued positive response from the business sector--despite some studies indicating that the new tax laws may eventually eliminate incentive for corporations to practice philanthropy. He says that, having worked in business for years, he is confident that corporations have more in mind than tax write-offs when contributing to universities.

Two reasons, he said, are that companies are eager to see new ideas developing in university laboratories and to improve community relations. "My guess is that there's no chance that corporations will stop giving, because they give for reasons that supercede tax cuts."

That same logic is precisely the reasoning behind Reardon's assertion that the Urban Institute and other economic researchers have ignored some key figures in their pessimistic equations. For one thing, Reardon points out, Harvardians are loyal.

Even the Urban Institute's Clotfelter agrees that Reardon may have him here. While he does not buy the argument that his study's models do not apply to Harvard, at least as far as the numbers go, he admits that "we haven't filled in for loyalty." In fact, Clotfelter goes on to say, if he were in the development office his strategy now would be to appeal more strongly than ever to alumni love for Fair Harvard. "If all schools were to appeal to loyalty and their alumni were to respond, then our predictions would be wrong," he admits.

That is what Campaign officials hope will happen at Harvard. If all goes according to this university's experience, they say, there will be no correlation between the new tax laws and giving. On the other hand, they admit that it is impossible to predict the results of any new measure, regardless of past performance. In any event, though, they are prepared to fight models with manpower. "If we let this [decreased giving] happen, it will become a self-fulfilling prophecy," Boland says.

Still, even the most rigorous of solicitation techniques may not compensate for other, less wide ranging aspects of the new tax laws. William Boardman, director of major gifts ($100,000 and up), admits to some trepidation about changes in estate tax laws, which may drastically alter the investment behavior of very wealthy citizens. Uncertainty about the future of laws that must be continually renewed may deter potential donors who are unsure about where to make long-term investments. And there is talk now in Washington of imposing select tax increases upon very specific assets, which may put yet another squeeze on major Harvard contributors, to whom fund drive officials attribute the current healthy state of the campaign.

"If you just stopped the world at this point, you could say things are kind of down," Reardon admits. But then he starts talking about how 92 per cent of alumni approached to serve as volunteer fundraisers accepted the challenge. And how unusual it is for any fund drive to be ahead of schedule. And how superbly organized and efficient the solicitation machine is. And how $70 million of the promises have already been made good.

Then Reardon says, "To a great number of alumni, Harvard means a lot." So if Campaign officials can no longer stress tax breaks when digging for gold, they will always fall back on what they believe is, at least in the mind of alumni, always the overriding consideration regardless of the economic advantages and drawbacks: Harvard itself. At least for now and despite charts and graphs from Washington, they're cautiously optimistic.

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