Government leaders, economists, and tax policy experts are already debating what the nation’s tax code will look like when the 2017 Tax Cuts and Jobs Act expires at the end of next year. Lost in the conversation, however, are the potential consequences for charitable giving.
Tax policy is often framed as a matter of government revenue. But changes to the tax code can have profound ripple effects on philanthropy that harm communities and the nation.
That’s why some of us in the philanthropy world are deeply concerned about the coming expiration of provisions in the tax legislation — signed into law by President Donald Trump — and efforts to revert to previous tax structures. Doing so could significantly increase taxes for Americans of all incomes, ultimately dampening charitable giving.
A total of 23 tax provisions are set to expire at the end of 2025, many of which helped fuel charitable giving trends in recent years. For example, the tax law temporarily increased the deduction limit on charitable contributions from 50 to 60 percent.
Additionally, by lowering the tax burden for most Americans, the tax legislation benefited philanthropy more broadly. That’s because a fundamental link exists between tax policy and charitable giving. A thriving economy translates to increased economic activity and disposable income, which fuels charitable generosity.
Studies show a one percentage point increase in marginal tax rates can lead to a nearly 0.8 percent decrease in gross domestic product. With charitable donations stuck at around 2 percent of GDP for several decades, any increase in taxes stemming from the expiring 2017 tax law could precipitate a significant decline in giving as economic activity slows and incomes fall.
Taxes and Charitable Giving
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Higher Education Giving
Trump-Era Tax Cuts Contributed to a Decline in Higher Ed Giving
Harms to Charity
The make-up of the next presidential administration could have a significant effect on what new tax legislation looks like next year. As a new Philanthropy Roundtable policy brief lays out, several tax changes under consideration by the Biden administration have the potential to inadvertently harm charitable giving. These include a proposed wealth tax, regulations on donor-advised funds, and changes to the charitable deduction.
Wealth tax. A wealth tax on assets exceeding $100 million, which Biden supports, or the recently reintroduced ultra-millionaire tax, would have a chilling effect on philanthropy because they target the assets of foundations as well as individuals. For example, under Vermont Senator Bernie Sanders’ wealth tax proposal, the assets of foundations would be taxed as if they were the personal wealth of the foundation’s founder. This would hinder grant makers’ ability to give generously by taking away an important tax incentive and diminishing the funds available for charitable causes.
Donor-advised funds. The Biden administration has expressed support for placing restrictions on foundations’ use of DAF contributions to meet their mandatory 5 percent annual distribution to charity. Critics charge that donor-advised funds violate the spirit of that requirement, arguing that foundations use their grants to DAFs to receive tax benefits without sending those contributions to charity.
But these proposed restrictions fail to acknowledge the legitimate reasons for foundations to use DAFs. These include simplifying administrative processes and bookkeeping, pooling resources with other donors, and protecting donor information when giving to a controversial cause — all vital for effective philanthropy.
Placing restrictions on grant makers’ use of DAFs would not only lead to less funds flowing to charities but could stifle innovative grantmaking. Research shows that DAFs promote greater flexibility and risk taking in giving, allowing foundations to explore unconventional approaches, such as social impact investing and collaborative funding, before expanding them on a larger scale.
Charitable deduction. Proposals to cap the charitable tax deduction for wealthy donors could have a similarly devastating effect. Specifically, the Institute for Policy Studies proposes applying a $500 million lifetime cap on charitable deductions.
Consider the extraordinary generosity of the nation’s 50 most philanthropic billionaires, who collectively donated nearly $12 billion in 2023 to a wide range of causes, including medical and scientific research, environmental sustainability, and improving economic mobility for low-income Americans. Capping deductions would significantly reduce the pool of resources available to support these crucial causes and services.
Part of a donor’s calculation when deciding to give to charity is the tax benefits of donating. This is important because affluent donors are twice as likely to give to charity and typically give about 14 times more than the average donor. Preventing wealthy donors from receiving any tax benefits on much of their donations will lead some to give less and leave charities with fewer resources to carry out their missions and support their communities.
The tax code is a complex web, and its effect on philanthropy is multifaceted. As policymakers navigate potential changes to the tax code, they need to consider the unintended consequences on charitable giving. A vibrant nonprofit world provides essential services and innovation often beyond the reach of government. Weakening it by inadvertently reducing donations would be a significant loss for millions of Americans.
The upcoming debates over the expiration of the 2017 tax law should not focus solely on generating revenue. The future of charitable giving must also be at the center of the conversation.