Data That Answers Charity's Anxiety

Bruce Bartlett -- Senior Fellow, National Center for Policy Analysis

The deduction for charitable contributions is one of the biggest "sacred cows" in the tax code. Churches, universities and museums all fear that loss of the deduction under a flat tax will sherply reduce giving and threaten their viability.

There is no question that allowing contributions to be deducted from taxable income reduces the cost of giving. If one is in the top tax bracket, giving $1 to charity only costs 60 cents. But this also means that any reduction in tax rates will increase the aftertax cost of giving even with the deduction.

Thus reducing the top tax rate from 70 percent in 1981 to 28 percent in 1987 doubles the aftertax cost of giving for someone in the top bracket from 30 cents to 62 cents. If one believes tax policy is what drives charitable contributions, then this should have caused giving to decline sharply. In fact, as the figure indicates, individual giving actually increases after rates were cut.

The explanation for this is that charitable contributions are not just a function of tax policy. In times when the economy is expanding and incomes are growing, people are more able to contribute to charity.

Another factor is that government welfare spending displaces private charity. In an article in the Journal of Political Economy (February 1984), Russell Roberts found that private relief expenditures rose steadily in the United States until 1932 and declined steadily thereafter as government welfare spending rose. He concluded that government spending crowded out private spending almost dollar-for-dollar. A similar analysis by Burton Abrams and Mark Schmitz in the National Tax Journal (December 1984) found "cuts in government programs may elicit significant additional interest in private contributing." Thus President Reagan's spending cuts may have been partly responsible for the rise in charitable giving.

In any event, only 23.3 percent of taxpayers deducted any charitable contributions last year, according to the Joint Committee on Taxation. And according to Independent Sector, many of those who contribute most generously have incomes too low to itemize. In 1993, families with incomes below $10,000 contributed an average of 2.7 percent of their income to charity, while those making $50,000 gave only 1.1 percent.

Lastly, it is clear that much gving is totally unrelated to deductibility. As Ralph Reed of the Christian Coalition has noted, "The motivations for giving are not fundamentally economic, but involve emotional impulses and other intangible influences." Thus in 1993 only 53 percent of all charitable contributions were itemized on individual tax returns. This suggests that many of the charitable institutions people care most about are likely to be unaffected by the flat tax.