President Obama’s Achilles heel was revealed in a little-noticed quote near the end of this report on his recent press conference. In defending his proposal to limit charitable and other deductions for higher-income taxpayers, Mr. Obama said, “I’m assuming that [the deduction] shouldn’t be the determining factor as to whether you’re giving that hundred dollars to the homeless shelter down the street,” he said. First, he asserts the astonishing view that incentives don’t matter. This reveals more than naiveté, but rather, fundamental economic illiteracy, a frightening shortcoming in a U.S. president who seeks to restructure the American economy during perilous economic times. Second, he conflates the normative with the empirical. He implies that, because incentives (in his view) “shouldn’t” determine economic behavior, they don’t.
This confusion of morality with economics is particularly ironic in a president who has promised to “get politics out of science.” Third, he consistently uses the debater’s trick of employing a trivial example in attempting to obscure a substantive contrary fact. Taxpayers in his proposed higher 39.6% bracket may not re-think their $100 charitable donations (if his limited deductibility becomes law), but they will, more damagingly, reassess their $10,000, $100,000, and $1,000,000 ones. As a financial planner, I can attest to the fact that higher-level charitable giving is often tax-driven. Beyond this single tax issue, and profoundly more disturbing, is Mr. Obama’s ignorance of the fact that incentives matter and of the fundamental market principles that underlie economic growth and prosperity.