Who benefits from charitable deductions?
The charitable deduction subsidizes charitable giving by lowering the net cost to the donor.
A charitable contribution is intended for the benefit of those supported by the charitable activity, whether through education, health care, or the like. If the tax deduction spurs additional giving, charitable organizations may be able to provide more services. Donors are assisted in their efforts by the charitable deduction, which reduces their own tax liability.
The charitable deduction subsidizes donors by lowering the net cost of the gift. Just how much the tax deductibility lowers the cost of giving depends on the donor’s marginal tax rate. For instance, a donor in the 30 percent tax bracket pays 30 cents less tax for every dollar donated. At the same time, the deduction subsidizes the ultimate beneficiaries of the charitable activities. The tax system is inconsistent about whether income should be treated as that of transferors or transferees. For instance, child support is treated as income of the transferor; alimony as income of the transferee.
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-quarters of charitable giving comes directly from individuals, with the balance coming from their foundations, estates, and corporations (figure 1). Total contributions totaled $358.4 billion in 2014.
The deductibility of contributions subsidizes charitable activity but is also sometimes independently justified as an appropriate adjustment to the tax base. Many economists argue that a taxpayer’s taxable income should be determined by income net of contributions, since a taxpayer with, say, $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. Thus, because part of the cost of their donations is borne by the government through reduced revenue, donors have a say in which activities the government supports.
Some donations fund activities that substitute for those the government might otherwise undertake. Other donations complement government 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 types of charitable activity make democracies healthier, even when particular chartable efforts have little impact.
Although the tax deduction likely induces additional giving, estimates of the size of this effect vary. Indeed, there is considerable debate over whether the increase in giving exceeds the loss of government revenue.
Colinvaux, Roger, and Harvey P. Dale. 2015. “The Charitable Contributions Deduction: Federal Tax Rules.” The Tax Lawyer 68 (2): 332–66.
Giving USA Foundation. 2015. Giving USA 2015: The Annual Report on Philanthropy for the Year 2014. Indianapolis: Giving USA Foundation.
Randolph, William C. 2005, “Charitable Deductions.” In NTA Encyclopedia of Taxation and Tax Policy, 2nd ed. Edited by Joseph J. Cordes, Robert D. Ebel, and Jane G. Gravelle, 51–53. Washington, DC: Urban Institute Press.
Rosenberg, Joseph. 2011. “Composition of Tax-Deductible Charitable Contributions.” Washington, DC: Urban Institute.
Rosenberg, Joseph, Patrick Rooney, C. Eugene Steuerle, and Katherine Toran. 2011. “What’s Been Happening to Charitable Giving Recently? A Look at the Data.” Washington, DC: Urban Institute.