As the tax reform debate continues in Washington, we can expect continuing liberal charges that the rich fail to pay their "fair share" currently — and would unjustly benefit from lower rates. But any push to raise top rates may well lead to collateral damage to something almost all Americans say they support: charitable giving. That's the conclusion that can be drawn from an impressive new analysis published by the Chronicle of Philanthropy.
"Nonprofit groups," the Chronicle reports, "have become more dependent on the wealthy generally." The analysis goes on to say: "The wealthy now account for more than 75% of itemized giving".
Charitable giving is notoriously sensitive to changes in the tax code.
At the same time, as overall charitable giving has continued to increase, the percentage of households making charitable contributions is on a downward trajectory. In other words, it's the vilified rich who are not only paying the lion's share of income taxes already — but an increasing share of charitable giving, as well. Nonprofits, writes the Chronicle's Drew Lindsay, are thus taking the "fewer donors, more money" approach to fundraising.
It's in this context that changes in the tax code can have big — and negative — implications for charitable giving, in which the U.S. has historically led the world.
Charitable giving is notoriously sensitive to changes in the tax code. As economists Jon Bakija and Bradley Heim have noted: People change their charitable donations in response to large, obvious future changes in federal marginal tax rates, with less conclusive evidence of a response to more subtle sources of future price changes. A higher top rate will have two effects: It will decrease the "price" of giving by raising the value of the tax deduction, but will also mean that those who are giving disproportionately will have less after-tax income to give.
The new findings that it's the rich who prop up charitable giving means that, in raising top rates, Congress will be playing with fire when it comes to providing support for civil society. Or, put another way, it means that Congress will effectively be saying that Washington can spend money better than charitably supported groups.
This matters because of another aspect of tax reform that's being discussed: raising the standard deduction. Such a change means that many more Americans will be able to file a simple tax return — and will have no need to itemize deductions for such things as mortgage interest, local taxes — or charitable giving.
As few as five percent of tax filers may have reason to itemize their returns. Convenient, to be sure. But this also means that the incentive to give to charity will be significantly cut back. The Lilly Family School of Philanthropy at Indiana University has estimated that such a change could reduce overall charitable giving — currently about $325 billion per year — by some $13 billion.
In other words, a higher top rate and an increased standard deduction could be a one-two punch that will hit charitable giving.
A higher top rate and an increased standard deduction could be a one-two punch that will hit charitable giving.
The changes also risk reinforcing an ominous trend — away from charitable giving as a household norm in America. As the Chronicle reports — based on data from Target Analytics — giving by small donors (gifts under $100) has declined precipitously. Over the past 14 years, it writes, the median number of small donors has declined by 25%. And the Lilly School finds that the share of households contributing to charity has declined from 67% (2004) to just 59% (2012).
To be sure, such findings may fail to pick up on households that put cash in the collection plate at church and do not itemize their tax returns. But the Lilly School looked to University of Michigan survey that uses longitudinal research of households generally — not just itemizers. So the possibility of Americans' virtuous habit of giving being broken is, sadly, real.
One possible fix is being floated in the tax reform discussion, that of allowing an "above the line" deduction for charitable giving, a tax break that would, in other words, apply to all households, even those taking the standard deduction.
Conservative Congressman Mark Walker of North Carolina, who heads the Republican Study Group, has gone so far as to file a bill that would allow those who take only the standard deduction nonetheless to deduct the value of their charitable deductions — so long as they do not exceed one-third of the value of the standard deduction. The Republican tax reform blueprint has proposed an increase in the standard deduction from $12,700 to $24,000 (for married couples).
This might be viewed as breaking the bank by those crafting the so-called House Blueprint for tax reform. As the Tax Foundation's Scott Greenberg has written: "In the context of the House Blueprint, the revenue loss from making the charitable deduction above the line would be even greater, $515 billion over ten years. This is because the overall structure of the House Blueprint would cause so many taxpayers to take the standard deduction and to stop claiming the charitable deduction. Thus, making the charitable deduction above the line would effectively restore the deduction for these taxpayers, which is why doing so would be so costly in the context of the House Blueprint."
Of course, for those who believe that American civil society can put that money to better use than does government, the cost would be worth the benefit. No matter what your view, however, it's clear that the fate of U.S. charitable giving is hanging in the balance of the current tax reform debate.
This piece originally appeared in the Investor's Business Daily
Howard Husock is the Vice President of Research and Publications at the Manhattan Institute.