Charitable Contributions and Tax
Revision
Jane Gravelle
These views do not represent the
Congressional Research Service
Basic Issues
• Efficiency issue: under-provision of contributions due
to free rider problem.
• Is tax subsidy best? Depends on price elasticity; if less
than one, revenue loss is greater than induced giving;
could increase charitable spending more with direct
spending. But is that feasible politically?
• Critics argue that private giving has a different mix of
recipients. True, but is that necessarily desirable?
Surprisingly little spending by charities on the poor:
about 25% to 30%; 22% to 26% for those with $1
million or over. And provision is largely in kind.
Price Elasticity
• Evidence from 1986 shows brief transitory effect,
no permanent effect, of large rate reduction.
• Cross section and panel econometric estimates
mixed, range from essentially zero to about 0.8.
We used a middle range of 0.5 to estimate a 1%
reduction in giving from the President’s proposal.
• Surveys and field experiments show small or even
negligible effects.
• Conclusion: evidence points to a low elasticity
and some inefficiency of the charitable subsidy as
a mechanism.
An Important and Overlooked Issue
• Some tax reform proponents support it not because of distortions
in tax subsidies, but because base broadening allows lower tax
rates, or avoids increases, reducing presumed deleterious effects on
labor supply, saving, and “entreprenuership.”.
• But if a deduction also applies at the margin the effective marginal
tax rate will not necessarily fall, indeed could rise, especially if
deductions rise as a share of income or if a proposal creates an
inframarginal benefit.
• Analysis of proposals to broaden the base and lower rate, such as
that of Governor Romney’s plan, do not capture this and overstate
the economic growth effects, even given their large responses.
• Charitable contributions of one of the deductions (along with state
and local taxes), that rise with income. So proposals that restrict the
incentive effect could also increase effective marginal tax rates on
labor and capital income.
Possible Revisions of the Charitable
Deduction
• In these times of revenue needs, we are likely
to be considering proposals to raise revenue.
• Some proposals are across the board, applying
to all major itemized deductions, and often
involving caps or limits. Charity could be
excluded, however.
• If charitable giving is considered desirable,
floors would be better than caps.
• Some potential revisions to address abuses.
Proposals and How to Evaluate:
Considering Revenue Neutral Plans
• Dollar caps would eliminate marginal incentives for
charitable giving for high income taxpayers but probably
raise overall marginal tax rate.
• Percentage of income caps would eliminate marginal
incentives for constrained itemizers but would have less of
an effect on raising marginal rates (because a dollar of
income would allow additional deductions). It’s like a phase
in rather than a phase out.
• Limiting the tax rate at which itemized deductions are
valued would do the same, but have a smaller more
targeted effect on high income taxpayers; estimated effect
on charitable giving is about 1%. Small increase in marginal
tax rate on income.
Evaluation cont.
• Caps tend to create inframarginal benefits. Only
desirable if the activity is undesirable.
• If charitable giving subsidy is considered desirable
and limits are desired, a floor is better than a cap.
It reduces the revenue cost without having as
much an effect on marginal incentives. Floor
should probably be as a percent of income. It will
create a small marginal tax rate much like Pease.
Also simplifies and reduces cheating.
Other More Focused Changes
• Congress may continue to be concerned about
aspects that may result in potential abuses.
• For example, the accumulation of deductible
funds without expending them for the charitable
purpose, such as donor-advised funds and
endowments (such as those of universities).
(Some of these issues were addressed in 2006,
but others might remain.) Options are requiring
payout rates or disallowing deductions until funds
are spent.
Narrower concerns
• Gifts of appreciated property: They get a double
dip (excluded from capital gains tax but fair
market value deductible); an incentive to
overvalue. This incentive would remain in a more
limited form if capital gains tax were imposed. It
would be eliminated if only the basis were
deductible: that would create an incentive to sell
and donate cash. (The latter approach would
create problems when the object itself is
desirable, such as giving art work to an art
museum).
Charitable Gifts of Appreciated
Property
• In 2005 a proposal to allow sale of property
but no capital gains tax if donated, which
eliminates part of the incentive to donate
appreciated property. This could be combined
with a requirement that the tax be paid, or
the deduction disallowed if donated directly.
(Still doesn’t solve the problem of gifts of art
to a art museum.)
• Also, baseball arbitration.
Extenders/Hospitals
• Two charitable extenders were allowed to
lapse in the latest legislation. Might there be
more? The largest of the extenders (in
revenue terms) is the provision allowing
contributions directly from IRAs.
• Concerns about limited charity care by
nonprofit hospitals were addressed by health
reform but this revision may be monitored.
Corporate Restrictions?
• Is the charitable deduction on the table for
corporate tax reform? One could argue that a
charitable deduction for corporations is
inappropriate, as this choice should be left to
stockholders. However, some corporate giving
may generate goodwill. Not yet discussed, but
there are proposals to eliminate all corporate
tax expenditures to permit a lower rate.