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Stop Focusing on the Charitable Deduction. Tax Policy Isn’t Causing the Long-Term Slide in Giving.

By  Suzanne Garment and 
Leslie Lenkowsky
January 14, 2020

As nonprofits await the tallies of how their year-end appeals did, the mood in the charitable world should be less gloomy than it was a year ago. Then, there were fears that the new tax law would devastate charitable giving, but it turns out that those fears were exaggerated. In 2018, according to the latest Giving USA annual report, which details how much Americans donate each year, the new law caused little overall decline.

Critics of the tax law are now focusing on another problem: an increase in the share of giving that comes from wealthier Americans, with a corresponding decrease in the shares from middle- and lower-income people. The critics worry that this change could fatten the coffers of charities favored by the rich and hurt those that serve the needy.

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As nonprofits await the tallies of how their year-end appeals did, the mood in the charitable world should be less gloomy than it was a year ago. Then, there were fears that the new tax law would devastate charitable giving, but it turns out that those fears were exaggerated. In 2018, according to the latest Giving USA annual report, which details how much Americans donate each year, the new law caused little overall decline.

Critics of the tax law are now focusing on another problem: an increase in the share of giving that comes from wealthier Americans, with a corresponding decrease in the shares from middle- and lower-income people. The critics worry that this change could fatten the coffers of charities favored by the rich and hurt those that serve the needy.

This new concern, too, is likely to prove exaggerated. More important, the data provide a larger lesson about the limits on the ability of short-term public-policy changes to alter long-term trends in philanthropy.

The critics’ current worry stems from the fact that the 2017 tax law nearly doubled the federal standard deduction — that is, the deduction that taxpayers can claim without having to list, or itemize, specific types of expenses. This change was expected to cut substantially the number of people who find it worth their while to itemize. And preliminary estimates indicate that did indeed occur. As a result, in the eyes of the tax bill’s critics, because fewer people will be motivated to give by the ability to get a tax deduction, they may give less or not at all. Only the very wealthy, they say, will have access to charitable deductions. “The clear message” from the federal government, as Independent Sector’s Dan Cardinali summarized the case, is that the donations of “some Americans” matter, but those of the “vast majority” do not.

To be sure, “Giving USA” does show a surge in 2018 giving by foundations and other vehicles commonly used by the wealthy, largely because the booming economy substantially increased endowments. This meant that a smaller share of total giving came from individuals and families. Still, two-thirds of all the dollars given came from living Americans, only slightly less than in the year before. Adding gifts by estates — that is, donations people made through their wills — put the “people” share above three-quarters of all donations.

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Decline in Share of Households That Give

Those who are concerned about “who gives” point to another fact they consider perhaps even more important: the decline in the overall percentage of American households that give to charity. For some perspective on this claim, we can turn to a recent study done by the Lilly Family School of Philanthropy together with Vanguard Charitable. This study, not part of “Giving USA,” is based on data collected by the University of Michigan. It shows that this decline has been going on for years. In 2000, 66 percent of households donated to charity at some point during the year; by 2016, the last year for which data was available, the figure had dropped to 53 percent.

The long-term nature of the trend suggests that it is likely due to similarly long-term economic and social changes rather than sudden policy shifts. One of those long-term changes is the increasing strain on incomes for those with relatively little education. (The “turning point,” the study notes, was the Great Recession of 2008-10.) Another likely cause of the long-term change is the diminishing number of people, especially among millennials, who give because of religious beliefs.

All in all, some 20 million fewer American households donated to charity in 2016 than at the beginning of the 21st century. The 2017 tax law could have had very little to do with that.

Over the same period, the study reports, American households contributed a declining percentage of their incomes to charity. But a closer focus on those households that did donate reveals a different pattern: The share of income donated by these households remained relatively unchanged. Indeed, the amount they gave rose slightly, from $2,584 per household in 2000 to $2,763 in 2016. The differences in generosity between lower-income and higher-income donor households remained small over the years.

Giving Not Shifting Much

A more recent study presents a complicated picture of where donations went over those 16 years, “Youth, Education, and Health Groups Hit Hardest by the Sharp Decline in Americans Who Give.” Per household, donors gave more to religious groups than to secular ones, as they always have. While the percentage of donors giving to causes such as education, health, and human needs declined, the average amount these causes received have remained steady. In other words, a smaller number of donors were making larger gifts, so the basic distribution of gifts to various causes hasn’t changed — and is not showing a shift to causes supported by the relatively well-off, let alone to the agenda of plutocrats.

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The Limits of Tax Policy

There is, however, a larger point here: It is not clear that federal tax policy can do much at this point to change the composition of “who gives.”

For one thing, the new law has expanded the standard deduction to a point at which the federal income-tax liability of lower-income taxpayers is low indeed. Even if such taxpayers could shrink their taxes by making more charitable gifts, they might not save all that much.

Another study by the Lilly Family School, this one done for Independent Sector, simulated the effects of a “universal charitable deduction,” a proposal to allow the charitable deduction to taxpayers whether or not they itemize. The study found that there would be increased donations — but that nearly three-quarters of the increased donations would likely come from upper-income donors.

Some of those who advocate more widespread giving have proposed a charitable tax credit rather than a deduction — that is, a tax benefit that would reduce not the amount of taxable income on which taxes are owed, but the amount of the tax itself. This arrangement could produce increased donations from lower-income people — but most of the additional giving would still come from the wealthiest 40 percent of Americans. After all, that’s where the money is.

What’s more, some of those who want more Americans to give to charity would raise tax rates on the better-off to compensate for a universal charitable deduction or tax credit. But in that case, wealthy donors would have even stronger incentives than they do now to contribute more and rake in correspondingly larger tax breaks.

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True, as taxpayers adjust their behavior to the 2017 tax law, we may see more shifts in charitable giving. Still, just as the impact of the new tax law has been marginal, the effects of trying to use the tax system to encourage lower-income people to give more would likely be marginal as well. If nonprofit leaders want to see more philanthropy flowing to organizations that they view as especially deserving, they should know that the most common policies proposed for this purpose fall far short.

There is a reason for this inadequacy: Unlike government spending, philanthropy is ultimately driven by what donors can and want to do, not what politicians or nonprofit leaders believe that donors should do. That is why trying to engineer the size and shape of tax deductions seems to have so little effect on giving — and why other engineering attempts are likely to have the same fate.

Leslie Lenkowsky is an Indiana University expert on philanthropy and public affairs and a regular contributor to these pages. He and Suzanne Garment, a visiting scholar at Indiana University, write frequently on philanthropy and public policy

We welcome your thoughts and questions about this article. Please email the editors or submit a letter for publication.
Government and RegulationFundraising from Individuals
Suzanne Garment
Suzanne Garment, a visiting scholar at Indiana University, writes frequently on philanthropy and public policy.
Leslie Lenkowsky
Leslie Lenkowsky is a professor emeritus of public affairs and philanthropic studies at Indiana University and a regular contributor to the Chronicle for more than 30 years.

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