Do tax deductions impact charitable giving?

Katie Comer places a dollar bill in a donation box atop a flatbed truck.

Kai Ryssdal: One hesitates to pry, but here goes all the same. Why do you give to charity? Presumably it's because you believe in the mission of the nonprofit in question. Does the tax deduction you get figure in at all?

I ask because there's a move afoot in Washington to reduce that deduction. Which brings us to our series Economy 4.0 and its examination of how to make the global economy work better for more people. It also brings us to our correspondent David Brancaccio. Hey David.

David Brancaccio: Hey there.

Ryssdal: So you got to help me out man. Why do people want to reduce incentives for giving, especially in times like these, when in theory people need charities in what they do?

Brancaccio: Well, No. 1 the government says it needs your money. It's not just anybody saying this. The president of the United States is quite enamored with the notion of looking at this charitable deduction. Who is not enamored are Democrats and Republicans on Capitol Hill. You can guess what charities think about this. And they've been lobbying like mad to get the idea of reducing the charitable deduction off the table. But according to Suzanne Perry, who's senior editor at the Chronicle of Philanthropy, the president won't let the idea go.

Suzanne Perry: People in the charitable world say, "He was one of us. He came out of a community organizing background." I think he is really convinced that this would be fairer.

Brancaccio: It would be fairer to reduce the amount that you get back if you give to charity.

Ryssdal: David, what do we know -- behavioral economics-wise -- about what happens if you reduce incentives. Do people in fact give less money?

Brancaccio: It looks like they do but just a bit. There are a bunch of studies -- and they don't all agree, but the estimate is last year we gave $290 billion to charity -- if they messed with the charitable deduction, lose about $1 billion to $3.2 billion. But there is a different way of looking at it. Eugene Steuerle is a tax expert with the Urban Institute. He says the impact of tax incentives is an age old question for economist -- they don't agree on what will happen, as these reports showed. But maybe you could think about it differently.

Eugene Steuerle: Economists generally believe that to the extent you care about incentives, they apply to the last dollar we give. So, you and I are likely to give to our church or to some local charity and we would do that whether we had a charitable deduction or not. But at the point in time at which we've already given that money away, our next dollars of giving are more sensitive. And we are sensitive to the extent to which there is an incentive.

Ryssdal: So David, riddle me this. Let's go back to the introduction when I said this series is about making the global economy work better for more people. What then can we say is the greater good? Collecting tax from people to use on, one imagines, government programs that help people? Or, encouraging people to give to charity?

Brancaccio: Well, think about it this way: If the government can collect more taxes, there is more money for the government to distribute for services. But if the tax incentive does encourage, say, wealthy donors to give away money, there are studies that show they tend to favor things like education rather than paying for basic needs -- because that's what the donors want. So it actually changes where the money goes. What is interesting is that the bipartisan super committee looking at doing the big cuts to the federal budget, they are going to look at this. And when that report comes out later in the month, I'm going to look down to this charitable deductions line.

Ryssdal: We'll see what it says. David Brancaccio and our series Economy 4.0. David, thanks a lot.

Brancaccio: You bet.

About the author

David Brancaccio is the host of Marketplace Morning Report. Follow David on Twitter @DavidBrancaccio
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I don't think it would effect my giving.

I'm sorry, but this just doesn't sound right. When I was a kid and we had progressive income tax rates, I distinctly remember grownups scrambling to get their charitable contributions in before the end of the year so they could take the deductions.

When the highest marginal rate is 90% (as it was in the 1950s when the economy did extremely well), the government takes 90 cents of the last dollar you make. And you keep 10 cents of that dollar. But if you give that dollar to charity (and keep none of it), you direct that dollar to what you think needs to be done.

Today, the highest marginal rate is 35%. So the government would take 35 cents of the last dollar and you'd get to keep 65 cents. Way better for you than keeping a dime. If you donate the last dollar to charity, you don't get the 65 cents, though you still direct that dollar to what you think is important. But now that control costs you 65 cents instead of 10 cents.

So the conclusion of this story that charitable giving is only very slightly affected by its deductibility needs to be qualified by the low value of deductions today (i.e., the low marginal tax rate). A higher marginal tax rate would reduce the cost/benefit ratio of charitable giving, leading a story like this to the opposite conclusion.

Well, if I "loose" my charitable deduction, I wouldn't really care.
I don't "thing" about things differently if there were no deduction.
As even now, I would give to charity and not take the deduction. Taking a deduction really dilutes the meaning of the donation.
Also, too many things can be a charity without much benefit to society.

The problem with charitable contributions can be found in this ’08 article written by Marketplace’s own Heidi Moore:


In which she is much kinder to Ayn Rand and her philosophy of psychological egoism than I would be. It has been over thirty years since I read Atlas Shrugged. The only reason I read it is to find out who John Galt was (Alan Greenspan, he ain’t). In that span of time, the world has given me a more realistic perspective of her fictional world. Take all her heroes in that book, change the circumstances to real world, real time events, and you find villains, not heroes. How did we ever come to be a country where this sort of material should even be considered required reading, while John Steinbeck, J.D. Salinger, and Mark Twain are banned or censored? In the interest of leveling out the charitable contribution playing field, why not create a charitable tax deduction that includes taxpayers who don’t itemize (thereby allowing ALL taxpayers a say)? It would be scaled in a way inversely proportional to income level, so as not to skew influence toward the wealthy. Each taxpayer would SELECT a proportion of where their federal taxes should go, with those in the lower brackets allowed to contribute a higher percentage than those in higher brackets. (Corporate deductions would have to end, of course, since corporations are not people.) Oh, oh, I think I may have stepped on a few Ayn Randian toes. That sounds an awful lot like participatory democracy

What do you mean by "limiting tax deductions" for charitable contributions? I thought the idea was to limit tax deductions for high-income individuals. The principle is that since their marginal tax rate is higher, they get a bigger bang for the amount they give than people in lower tax brackets.

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