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Tax-Exempt Organizations: Who benefits from charitable deductions?

A charitable contribution is intended ultimately for the benefit of those whom the charitable activity supports, whether through more educational resources, free health care, or in some other way. If the tax deduction spurs additional giving, charitable organizations may be able to expand and provide additional services. Donors are assisted in their efforts by the charitable deduction, which reduces their own tax liability.

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  • The charitable deduction subsidizes charitable giving by lowering the cost to the taxpayer of giving. How much the tax deductibility of contributions lowers the cost of giving depends on the donor’s marginal tax rate. For instance, a donor whose marginal tax rate is 30 percent pays 30 cents less tax for every dollar donated.
  • Higher-income individuals generally benefit more from the charitable deduction than those with lower incomes for two reasons: they have higher marginal tax rates, and they are more likely to itemize deductions and take advantage of the tax savings. About three-fourths of charitable giving comes directly from individuals, with the balance coming from their foundations, estates, and corporations (see figure). Total contributions totaled more than $260 billion in 2005.
  • The tax deductibility of contributions subsidizes charitable activity, but also is justified as an adjustment to the tax base. Many argue that a taxpayer’s tax base should be determined by income net of contributions, since a taxpayer with $50,000 of income and $10,000 of contributions has no more ability to consume than someone with $40,000 of income and no contributions.
  • Donors may choose which charitable activities to support. Because part of the cost of their donations is borne by the government through reduced revenue, donors effectively have a say in which activities the government supports.
  • Some donations substitute for activities the government might otherwise undertake. Some complement those activities, and still others support an adversarial relationship with government. Nonprofits, for instance, may seek, further government funding for a given activity or its members may engage in debates with government officials. Many believe these multiple types of charitable activity add to the efficient functioning of a democracy even when particular efforts fail.
  • Although the tax deduction likely induces additional giving, estimates of the size of this effect vary, and there is considerable debate over whether the increase in giving exceeds the loss of revenue.
 
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    Entry 3 of 4