Effects of Eliminating the Charitable Giving Tax Deduction

August 16, 2013

The income tax's charitable deduction serves the valuable purpose of encouraging private giving. Private charities are often more cost conscious, responsive, better targeted and invite greater citizen participation than government outlay programs. The deduction also recognizes that people contributing to charities are transferring part of their incomes to others, which reduces their ability to pay taxes out of what remains. The Joint Committee on Taxation and the Treasury, however, classify the charitable deduction as a tax expenditure because it would not be included in what they regard as a normal, broad-based income tax, say Michael Schuyler and Stephen J. Entin of the Tax Foundation.

  • In a conventional static revenue estimate that holds total economic activity constant, the Tax Foundation's model estimates that repealing the charitable deduction would raise federal income tax receipts by $39 billion.
  • Disallowing the charitable deduction would lower gross domestic product by $40 billion, which would trim the revenue gain to $30 billion.
  • The growth slowdown occurs because the loss of the deduction increases people's taxable incomes, pushing more of them into higher tax brackets.

Schuyler and Entin also determine the impact of these scenarios on employment and wages.

  • They find that eliminating the charitable deduction would decrease employment by the equivalent of about 131,000 full-time workers and cut hourly wages by 0.2 percent.
  • With the rate cut offset, employment would increase by the equivalent of about 200,000 full-time workers but hourly wages would fall by about 0.1 percent.

Source: Michael Schuyler and Stephen J. Entin, "Case Study #11: Deduction for Charitable Contributions," Tax Foundation, August 9, 2013.

 

Browse more articles on Tax and Spending Issues