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U.S. Tax Policy and Charitable Giving

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How much, for whom, to what end?

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The raising of extraordinarily large sums of money, given voluntarily and freely by millions of our fellow Americans, is a unique American tradition... Philanthropy, charity, giving voluntarily and freely... call it what you like, but it is truly a jewel of an American tradition.

--John F. Kennedy

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2009 Charitable Giving in U.S.Total = $303.75 Billion

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Who Benefits

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U.S. Giving Compared to Other Countries (2005)

Country Giving as % of GDP

United States 1.67

United Kingdom 0.73

Canada 0.72

Australia 0.69

South Africa 0.64

Rep of Ireland 0.47

Netherlands 0.45

Singapore and New Zealand 0.29

France 0.14

Source: Charities Aid Foundation, November 2006

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U.S. Tax Incentives for Giving

• Individuals and corporations that itemize can deduct a certain percentage (depending on their level of income) of charitable donations from their federal income tax. – Individual itemizers represent about 35 percent of

taxpayers; 90% claim a charitable deduction.

• Full deductions for bequests.– 18% of estates filing estate tax returns make charitable

bequests.

• Most states with personal income taxes have some type of tax incentive for charitable giving.

Source: U.S. Dept of Treasury, Joulfaian, 2005.

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Proposed Tax Changes

.33 - .35 cents

.28 cents

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Criticisms and Claims

• Reducing the charitable deduction will “crowd out” civil society and discourage charitable donations.

• It will shift resources from private nonprofit charitable organizations to the federal government, which is consistently less effective and efficient in caring for the needy.

--Messmore, The Heritage Foundation

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Questions

• How much is giving affected by tax incentives?

• Whom do tax incentives benefit?

• To what end do/should tax incentives exist (if at all)?

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How Much?

Tax incentives essentially lower the cost of giving.

For an itemizer in the 28% tax bracket:

Giving $100 Net cost = $72

Tax price

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How Much?

Price elasticity of giving = How responsive giving is to a change in its cost.

If reduce cost of giving by 50%:

What is the price elasticity of giving?

If > 1.0 it is “treasury efficient” = increase giving > estimated revenue cost of tax subsidy/incentive

Price Elasticity Change in Giving Example

-1.0 Increase giving 50% $100 $150

-0.5 Increase giving 25% $100 $125

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How Much?Studies on the price elasticity of giving show mixed results:•Clotfelter (1985) found a range for the elasticity of charitable giving relative to changes in the tax price of giving of between -1.1 and -1.3.•More recent studies have challenged the conclusion that giving is so sensitive, estimating price elasticities that are much smaller or even positive.

– e.g. Barrett, McGuirk, and Steinberg (1997, p. 321) found, using panel data, price elasticity at +.47.

•The Tax Reform Act of 1986 increased the after-tax cost of giving, often significantly, but the predicted drop in giving did not materialize.

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How Much?

• Giving as percent of GDP has remained about the same for past 40 years (ave. 1.9%)

Source: Giving USA

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Estimated Impact of Proposed Tax Changes

• Policy centers estimate ranges from little to no impact to a decrease of 12%.

• Many already limited to 28% deduction.

• Many other factors influence giving.

.33 - .35 cents

.28 cents

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How Much?Not all donors are motivated in the same way by tax incentives.•Center on Philanthropy study of wealthy donors found 52% said giving would remain the same if they no longer received any income-tax deduction for donations.

– 37% said giving would “somewhat decrease” and 10% said it would “dramatically decrease.”

•Independent Sector found only about 1/3 of respondents in 1989 and 1991 Giving and Volunteering Surveys reported tax considerations and deductions as major or minor motivation to give to charity.

– Tax considerations major motivation, price elasticity of giving - 2.21– Tax considerations minor motivation, price elasticity of giving - 0.79– Tax considerations no motivation, price elasticity of giving 0.02

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How Much?Sensitivity to charitable tax incentives also differs among types of funding areas

•Educational institutions and hospitals very sensitive •Health and social welfare less sensitive •Religious organizations least sensitive

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Environmentand animals

$6.602.2%

Foundations$29.50 10.0%

Humanservices$29.56 10.0%

Internationalaffairs$11.343.8%

Arts, culture, and humanities

$12.514.2%Public-society

benefit$21.417.3%

Unallocatedgiving$26.088.8%

Health $20.226.9%

Religion $96.82 32.8%

Education$40.98 13.9%

Types of recipients of contributions, 2006, total = $295.02 billion

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Who Benefits• Google /The Center on Philanthropy study (2007) found

“less than one-third of the money individuals gave to nonprofits was focused on the needs of the economically disadvantaged.”

• Institute for Jewish and Community Research found only 5% of the total dollars from mega-gifts (gifts of $1 million dollars or more) go to social service groups.– 44% to colleges and universities, – 16% hospitals and other medical institutions – 12% arts and cultural organizations

• Charitable organizations that rely heavily on giving are less likely to serve the poor (Salamon, 1992; Galaskiewicz, 2005).

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Who Benefits

Country Giving as % of GDP

GiniIndex

% Child w/ Income < 50% of Median

United States 1.67 40.8 21.7

United Kingdom 0.73 36.0 16.2

Canada 0.72 32.6 13.6

Australia 0.69 35.2 11.6

Netherlands 0.45 30.9 9.0

Germany 0.22 28.3 10.9

France 0.14 32.7 7.3

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Who DecidesWealthier individuals have more of a say in who benefits: •Those at the highest tax bracket (35% in the U.S. in 2008) receive the largest deduction, those in the lowest tax bracket (10%) receive the lowest deduction.

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Who Decides?

Public revenues lost as a result of charitable tax deductions were estimated to be more than $50 billion in 2008.

•4th largest tax expenditure•More than half of the annual budget for the U.S. Department of Housing and Urban Development. •Nearly 20 times what the U.S. spends on international development assistance.

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For What?• Charitable tax incentives rest on the assumption that

individual donors, rather than government officials, “should have a stronger voice in determining how the needs of low-income families and communities are addressed” (De Vita & Twombly, 2005, p. 570). – Clearly not adequate for addressing social welfare issues.– Providing interventions to compel donors for social welfare

compromises one of most valuable aspects of philanthropy-- donors’ freedom to choose.

– Allows wealthy to decide.

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Conclusion• Reich—providing tax incentives really only makes sense

in encouraging equal opportunities for citizens to participate in civil society.– Flat and capped nonrefundable tax credit for charitable

donations.

• More progressive tax policies that compel wealthy individuals to pay a greater share into government coffers.