Thursday, March 6, 2008

The Donator's Fallacy

Many of you altruistic, do-gooder types have found that you can make pain-free donations to your favorite charities such as your alma maters, animal rights groups, etc. just by enrolling in their credit card. Typically 1% of your purchases are then donated to your charity, and you never feel the pinch. It’s a brilliant and easy way to feel good about yourself and to give something back. But I have just one question for you…


So, your parents spent thousands for you to get a great education at a top-notch university. Then you pay them back by showing them how stupid you can be. Why would you a) allow a multi-billion dollar corporation such as your bank get the tax deduction on YOUR money b) why would you donate less than you actually could? Or, in this materialist society of ours c) why would you forfeit the opportunity to get something for yourself (via credit card rewards)?

Let me illustrate this logic by way of a simple example…

Simon, a University of Higher Learning graduate, receives an offer in the mail for the UHL Rewards Credit Card. He learns that 1% of his purchases on the card will be donated to UHL. This makes Simon feel warm and fuzzy. He gets the card. He spends $25,000 on the card in the first year.

Simon’s bank turns around and donates $250 to UHL. The bank gets the tax deduction. Simon gets a notice that the donation was made. Simon feels warm and fuzzy.

Simon then bumps into CardTuna, I splash some salt water into his face and I force him to think about things. I point out to Simon that had he donated $250 of his own cash to UHL, he would have been able to take a deduction on the donation of about $75 (given his tax bracket). That means Simon would have really only been out of pocket only $175 on the $250 donation OR it means he could have actually donated $357 if he chose to be out of pocket $250 after his tax deduction. So, I force Simon to see that a) either HE or his alma mater are getting screwed and b) the big corporation wins.

I then rush Simon over to the nearest cross-cut shredder so he can chop his UHLRewards credit card to pieces. I advise Simon to apply for one of many credit cards that offer 1% cash back on purchases. He complies. In the next year, he takes the 1% cash back, donates it to UHL and pockets the $75 tax deduction. Now, Simon concludes that he wins, UHL gets the same benefit it would have with his now-destroyed UHLRewards card. Simon still feels warm and fuzzy, but he also feels like his UHL education was actually worth something.

Rock on Simon. Rock on.


1 comment:

Anonymous said...

wow, I never looked at it that way. I've had my UMass card for like 15 years. I'm cutting it up right after I'm done typing this!


John B.
Providence, RI