Tax Breaks Play a Key Role in Giving Decisions, Economists Say
charities are far more likely to be affected by a tax change than others—
donors who are wealthy tend to support
colleges, hospitals, and other big organizations and they are the ones who
would most likely change their giving
patterns under the Obama proposal.
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Because so much of the research on
the charitable deduction by economists
and think tanks is inconclusive, new efforts are under way to get answers. The
research takes on more urgency this
fall because ideas beyond those suggested by Mr. Obama are likely to get
A new Congressional “super committee” will work to identify how to trim
more than $1.2-trillion from the federal deficit over 10 years—and changes in
the way taxpayers are rewarded for giving to charity could be part of the solution.
The Senate Finance Committee is
also expected to hold a hearing on char-itable-giving incentives in mid-October
as part of its broader effort to consider
ways to overhaul the tax code.
All of this has prompted high-profile
groups like the Urban Institute, which
has received a $1-million research
grant from the Bill & Melinda Gates
Foundation, to explore how a change to
the charitable deduction would affect
The Center on Philanthropy at Indiana University, which first looked at the
potential impact of President Obama’s
proposals on the charitable deduction in
2009, also plans to release an updated
study next month.
Its verdict two years ago: Giving by
people who itemize their taxes would
probably have dropped by less than 1
percent if this plan had been in effect
To figure out what is known so far
about the importance of tax incentives
to donors, The Chronicle examined more
than 30 studies and interviewed half a
One of the most recent independent
studies quantifies just how much of a
difference the incentive makes. Two
college professors, Jon Bakija and Bradley T. Heim, studied tax data to follow
more than 60,000 mostly high-income
taxpayers from 1979 to 2006, looking at
how similar donors in different states
responded to their various state tax incentives.
Mr. Bakija, of Williams College, and
Mr. Heim, of Indiana University, tried
to strip away other factors that might
be influencing people beyond tax policy—such as wealth, social attitudes,
and religious commitment.
And since previous research has
shown that donors often shift some of
their donations from one year to the
next when they anticipate tax-law
changes, the researchers wanted to follow taxpayers for many years so they
could see how their giving changed in
the long run.
In a study published in June, they
concluded that all else being equal, if
the tax savings for giving another dollar to charity goes up one cent, donors
A study found that if tax
savings for giving another
dollar goes up 1 cent,
donors will increase gifts
by more than 1 percent.
will increase their contributions by a
bit more than 1 percent. And they will
trim their giving by a similar amount if
their tax savings fall.
Put another way: If a donor gets a 35-
percent tax break for her gift, she will
donate about 35 percent more than she
would have with no tax incentive.
Influence of Tax Savings
If the plan Mr. Obama proposed last
month were to take effect, and if Mr.
Bakija and Mr. Heim are right, then
here’s what would happen for a donor
who gave $1,000 to charity in 2011 and
earned enough to be in the highest in-come-tax bracket.
This year she gets a 35-percent tax
break on all of her itemized deductions, including gifts to charity. So her
$1,000 in gifts costs her just $650 out
of pocket because she receives $350 in
However, if the president’s proposal
were to become law, she could write off
only 28 percent of her gifts. That means
she would save only $280 on her taxes and her donation would cost $720—
nearly 10. 8 percent more than it did
before. Mr. Bakija and Mr. Heim’s research suggests that the donor would
probably decrease her contribution by
slightly more than 10. 8 percent so that
her out-of-pocket costs would be closer
to those under the old tax law.
So the recipients of her gifts would
lose more than $108.
MORE ON THE CHARITABLE DEDUCTION
See videos explaining the president’s proposal, a collection of key studies, and
essays from economists on the deduction’s impact. For details, go to:
President Obama has proposed to reduce the value of the
itemized deductions that wealthy people can claim, including
write-offs for charitable gifts. Here’s how two economists,
Jon Bakjia and Bradley T. Heim, say a typical donor would
probably change her giving:
How Tax Breaks Influence Donors
Under current law
Under Obama plan
Amount donor gives
Percentage she can write off in taxes
Out-of-pocket cost of the gift
Economists’ prediction: Donor will give about $892, not
$1,000, under Mr. Obama’s plan.
Note: Calculations assume that no other changes, such as turbulence
in the economy, would influence how much a donor wants to give.
To be sure, the economists say, other factors in her life, including any additional changes made in the tax code,
could also affect her decision to give.
Expiring Tax Cuts
If all wealthy taxpayers lowered their
donations by the percentages suggested
by Mr. Bakija and Mr. Heim, that could
cause a significant decrease for groups
that get money from the affluent.
President Obama’s proposal would affect taxpayers with adjusted gross incomes of at least $200,000 ($250,000
for married couples) who itemize their
gifts. Taxpayers earning at least
$200,000 represented 2. 8 percent of all
people filing tax returns in 2009, according to Internal Revenue Service
data. However, they donated 37 percent
of the $158-billion in itemized charitable gifts made that year.
Not every wealthy taxpayer would be
affected by the proposed limit, however. Some already face a 28-percent limit on itemized deductions because they
are subject to the “alternative minimum tax,” a system that seeks to prevent high-income taxpayers from using
loopholes to avoid paying taxes.
While the charitable deduction is important, it is not the only tax policy that
A 2010 Congressional Research Ser-
vice report on Mr. Obama’s plan to
limit the charitable deduction notes,
for example, that he also hopes to in-
crease the capital-gains tax. That, it
said, could prompt more people to do-
nate stocks and other assets that would
otherwise be subject to the tax because
they have grown sharply in value.
Changes in the charitable deduction don’t play out equally for nonprofit
groups, say economists, because of the
differences in the types of organizations
that get support from the wealthy.
In a 1975 study of tax data, Martin
Feldstein, professor of economics at
Harvard University, and Amy Taylor,
now an economist at the federal Agency for Healthcare Research and Quality, concluded that gifts to educational
institutions and hospitals were strongly influenced by tax considerations but
those to religious groups were not.
After analyzing data about where
high earners donate most of their money, the Congressional Research Service
report estimated that Mr. Obama’s plan
to limit the charitable deduction would
depress giving the most to health organizations, followed by arts and education groups, while donations to chari-