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The Tax Policy Center's

Briefing Book

A citizen’s guide to the fascinating (though often complex) elements of the US tax system.

Tax Policy Center Briefing Book

Key Elements of the U.S. Tax System

  • Briefing Book
  • Taxes and Charitable Giving
  • How would various proposals affect incentives for charitable giving?
  • Chapters
    • Introduction
      • Introduction
        • Introduction
    • Some Background
      • Federal Budget
        • What are the sources of revenue for the federal government?
        • How does the federal government spend its money?
        • What is the breakdown of revenues among federal, state, and local governments?
        • How do US taxes compare internationally?
      • Federal Budget Process
        • How does the federal budget process work?
        • What is the history of the federal budget process?
        • What is the schedule for the federal budget process?
        • What is reconciliation?
        • How is a budget resolution enforced?
        • What is PAYGO?
        • What are rescissions?
      • Federal Budget Outlook
        • How accurate are long-run budget projections?
        • What have budget trends been over the short and long term?
        • How much spending is uncontrollable?
        • What are tax extenders?
        • What options would increase federal revenues?
        • What does it mean for a government program to be off-budget?
        • How did the TCJA affect the federal budget outlook?
      • Taxes and the Economy
        • How do taxes affect the economy in the short run?
        • How do taxes affect the economy in the long run?
        • What are dynamic scoring and dynamic analysis?
        • Do tax cuts pay for themselves?
        • On what do economists agree and disagree about the effects of taxes on economic growth?
        • What are the economic effects of the Tax Cuts and Jobs Act?
      • Economic Stimulus
        • What is the role of monetary policy in alleviating economic downturns?
        • What are automatic stabilizers and how do they work?
        • What characteristics make fiscal stimulus most effective?
      • Distribution of Tax Burdens
        • How are federal taxes distributed?
        • Are federal taxes progressive?
        • How should progressivity be measured?
        • What is the difference between marginal and average tax rates?
        • What criticisms are levied against standard distributional analysis?
        • How should distributional tables be interpreted?
        • Who bears the burden of the corporate income tax?
        • Who bears the burden of federal excise taxes?
        • How do financing methods affect the distributional analyses of tax cuts?
        • How do taxes affect income inequality?
      • Tax Expenditures
        • What are tax expenditures and how are they structured?
        • What is the tax expenditure budget?
        • Why are tax expenditures controversial?
        • What are the largest tax expenditures?
        • How did the TCJA affect tax expenditures?
      • Tax Gap and Tax Shelters
        • What is the tax gap?
        • What does the IRS do and how can it be improved?
        • What is a tax shelter?
      • Recent History of the Tax Code
        • What did the 2008–10 tax stimulus acts do?
        • What did the American Taxpayer Relief Act of 2012 do?
        • How did the Tax Cuts and Jobs Act change personal taxes?
        • How did the Tax Cuts and Jobs Act change business taxes?
    • Key Elements of the U.S. Tax System
      • Individual Income Tax
        • What is the standard deduction?
        • What are itemized deductions and who claims them?
        • How did the TCJA change the standard deduction and itemized deductions?
        • What are personal exemptions?
        • How do federal income tax rates work?
        • What are tax credits and how do they differ from tax deductions?
        • How do phaseouts of tax provisions affect taxpayers?
      • Capital Gains and Dividends
        • How are capital gains taxed?
        • What is the effect of a lower tax rate for capital gains?
        • What is carried interest, and how is it taxed?
        • How might the taxation of capital gains be improved?
      • AMT
        • What is the AMT?
        • Who pays the AMT?
        • How much revenue does the AMT raise?
        • How did the TCJA change the AMT?
      • Taxes and the Family
        • What is the child tax credit?
        • What is the adoption tax credit?
        • What is the earned income tax credit?
        • Do all people eligible for the EITC participate?
        • How does the tax system subsidize child care expenses?
        • What are marriage penalties and bonuses?
        • How did the TCJA change taxes of families with children?
      • Taxes and the Poor
        • How does the federal tax system affect low-income households?
        • What is the difference between refundable and nonrefundable credits?
        • Can poor families benefit from the child tax credit?
        • Why do low-income families use tax preparers?
        • How does the earned income tax credit affect poor families?
        • What are error rates for refundable credits and what causes them?
        • How do IRS audits affect low-income families?
      • Taxes and Retirement Saving
        • What kinds of tax-favored retirement arrangements are there?
        • How large are the tax expenditures for retirement saving?
        • What are defined benefit retirement plans?
        • What are defined contribution retirement plans?
        • What types of nonemployer-sponsored retirement savings accounts are available?
        • What are Roth individual retirement accounts?
        • Who uses individual retirement accounts?
        • How does the availability of tax-favored retirement saving affect national saving?
        • What’s the difference between front-loaded and back-loaded retirement accounts?
        • What is an automatic 401(k)?
        • How might low- and middle-income households be encouraged to save?
      • Taxes and Charitable Giving
        • What is the tax treatment of charitable contributions?
        • What entities are tax-exempt?
        • Who benefits from the deduction for charitable contributions?
        • How would various proposals affect incentives for charitable giving?
        • How large are individual income tax incentives for charitable giving?
        • How did the TCJA affect incentives for charitable giving?
      • Taxes and Health Care
        • How much does the federal government spend on health care?
        • Who has health insurance coverage?
        • Which tax provisions subsidize the cost of health care?
        • How does the tax exclusion for employer-sponsored health insurance work?
        • What are premium tax credits?
        • What tax changes did the Affordable Care Act make?
        • How do health savings accounts work?
        • How do flexible spending accounts for health care expenses work?
        • What are health reimbursement arrangements and how do they work?
        • How might the tax exclusion for employer-sponsored health insurance (ESI) be reformed?
      • Taxes and Homeownership
        • What are the tax benefits of homeownership?
        • Do existing tax incentives increase homeownership?
      • Taxes and Education
        • What tax incentives exist for higher education?
        • What tax incentives exist to help families pay for college?
        • What tax incentives exist to help families save for education expenses?
        • What is the tax treatment of college and university endowments?
      • Tax Complexity
        • Why are taxes so complicated?
        • What are the benefits of simpler taxes?
        • What policy reforms could simplify the tax code?
      • Wealth Transfer Taxes
        • How do the estate, gift, and generation-skipping transfer taxes work?
        • Who pays the estate tax?
        • How many people pay the estate tax?
        • What is the difference between carryover basis and a step-up in basis?
        • How could we reform the estate tax?
        • What are the options for taxing wealth transfers?
        • What is an inheritance tax?
      • Payroll Taxes
        • What are the major federal payroll taxes, and how much money do they raise?
        • What is the unemployment insurance trust fund, and how is it financed?
        • What are the Social Security trust funds, and how are they financed?
        • Are the Social Security trust funds real?
        • What is the Medicare trust fund, and how is it financed?
      • Excise Taxes
        • What are the major federal excise taxes, and how much money do they raise?
        • What is the Highway Trust Fund, and how is it financed?
      • Energy and Environmental Taxes
        • What tax incentives encourage energy production from fossil fuels?
        • What tax incentives encourage alternatives to fossil fuels?
        • What is a carbon tax?
      • Business Taxes
        • How does the corporate income tax work?
        • What are pass-through businesses?
        • How are pass-through businesses taxed?
        • Is corporate income double-taxed?
      • Tax Incentives for Economic Development
        • What is the new markets tax credit, and how does it work?
        • What is the Low-Income Housing Tax Credit and how does it work?
        • What are Opportunity Zones and how do they work?
      • Taxes and Multinational Corporations
        • How does the current system of international taxation work?
        • How do US corporate income tax rates and revenues compare with other countries’?
        • What are the consequences of the new US international tax system?
        • How does the tax system affect US competitiveness?
        • How would formulary apportionment work?
        • What are inversions, and how will TCJA affect them?
        • What is a territorial tax and does the United States have one now?
        • What is the TCJA repatriation tax and how does it work?
        • What is the TCJA base erosion and anti-abuse tax and how does it work?
        • What is global intangible low-taxed income and how is it taxed under the TCJA?
        • What is foreign-derived intangible income and how is it taxed under the TCJA?
    • How Could We Improve the Federal Tax System?
      • Comprehensive Tax Reform
        • What is comprehensive tax reform?
        • What are the major options for comprehensive tax reform?
      • Broad-Based Income Tax
        • What is a broad-based income tax?
        • What would and would not be taxed under a broad-based income tax?
        • What would the tax rate be under a broad-based income tax?
      • National Retail Sales Tax
        • What is a national retail sales tax?
        • What would and would not be taxed under a national retail sales tax?
        • What would the tax rate be under a national retail sales tax?
        • What is the difference between a tax-exclusive and tax-inclusive sales tax rate?
        • Who bears the burden of a national retail sales tax?
        • Would tax evasion and avoidance be a significant problem for a national retail sales tax?
        • What would be the effect of a national retail sales tax on economic growth?
        • What transition rules would be needed for a national retail sales tax?
        • Would a national retail sales tax simplify the tax code?
        • What can state and local sales taxes tell us about a national retail sales tax?
        • What is the experience of other countries with national retail sales taxes?
        • What did the President’s Advisory Panel on Federal Tax Reform say about the national retail sales tax?
      • Value Added Tax (VAT)
        • What is a VAT?
        • How would a VAT be collected?
        • What would and would not be taxed under a VAT?
        • What would the tax rate be under a VAT?
        • What is the difference between zero rating and exempting a good in the VAT?
        • Who would bear the burden of a VAT?
        • Is the VAT a money machine?
        • How would small businesses be treated under a VAT?
        • What is the Canadian experience with a VAT?
        • Why is the VAT administratively superior to a retail sales tax?
        • What is the history of the VAT?
        • How are different consumption taxes related?
      • Other Comprehensive Tax Reforms
        • What is the flat tax?
        • What is the X-tax?
      • Recent Comprehensive Tax Reform Proposals
        • Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System, Report of the President’s Advisory Panel on Federal Tax Reform, November 2005
        • The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform, December 2010
        • Debt Reduction Task Force, “Restoring America’s Future,” Bipartisan Policy Center, November 2010
        • The Tax Reform Act of 2014: Fixing Our Broken Tax Code So That It Works for American Families and Job Creators, House Ways and Means Committee
        • The Graetz Competitive Tax Plan, Updated for 2015
      • Return-Free Tax Filing
        • What is return-free filing and how would it work?
        • What are the benefits of return-free filing?
        • What are the drawbacks of return-free filing?
        • How would the tax system need to change with return-free filing?
        • Who would qualify for return-free filing?
        • Would return-free filing raise taxes?
        • What was the experience with return-free filing in California?
        • What other countries use return-free filing?
    • The State of State (and Local) Tax Policy
      • State and Local Revenues
        • What are the sources of revenue for state governments?
        • What are the sources of revenue for local governments?
      • Specific State and Local Taxes
        • How do state and local individual income taxes work?
        • How do state and local sales taxes work?
        • How do state and local property taxes work?
        • How do state and local corporate income taxes work?
        • How do state estate and inheritance taxes work?
        • How do state earned income tax credits work?
        • How do state and local severance taxes work?
        • How do state and local soda taxes work?
        • How do marijuana taxes work?
      • Fiscal Federalism and Fiscal Institutions
        • How does the deduction for state and local taxes work?
        • What are municipal bonds and how are they used?
        • What types of federal grants are made to state and local governments and how do they work?
        • What are state rainy day funds, and how do they work?
        • What are tax and expenditure limits?
        • What are state balanced budget requirements and how do they work?
    • Glossary
      • Glossary
        • Glossary

How would various proposals affect incentives for charitable giving?

Taxes and Charitable Giving

<4/6>
Individual Taxes
Q.

How would various proposals affect incentives for charitable giving?

A.

Proposals include providing more effective or more universal incentives for charitable giving, but often in exchange for some restrictions, such as a floor or a small percentage of income above which incentives would be provided. Many proposals aim to enhance the amount of giving per dollar of revenue loss; some take account of IRS capabilities to monitor taxpayer claims.

Under current law, taxpayers who itemize deductions can deduct most of their charitable contributions, thereby reducing their tax liability. Most taxpayers give up that charitable incentive, along with other itemized deductions, to take a standard deduction of greater value.

A More Universal deduction

Until recently, a significant share of taxpayers could claim a deduction for charitable giving, along with other itemizable expenses such as mortgage interest deductions.

The 2017 Tax Cuts and Jobs Act (TCJA), however, went in the opposite direction and reduced tax subsidies for charitable giving to less than 10 percent of all taxpayers. It did so not directly but mainly through several provisions that together substantially increased the share of taxpayers taking a larger standard deduction in lieu of a smaller amount of itemizable expenses, including the charitable deduction. Accordingly, renewed interest has been expressed in a more universal deduction, though advocates often favored such a proposal to expand the reach of the charitable deduction even when a greater share of taxpayers itemized.

A more universal deduction likely would displace the existing deduction for itemizers. Some proposals, however, would create two charitable incentives, one for itemizers and one for everyone else, despite the complexity this would create. A completely universal deduction, almost without restriction, raises two issues: effectiveness and compliance.

First, incentives for the first dollars of giving are considered relatively ineffective because they subsidize giving that taxpayers would take with or without a deduction. Consider a taxpayer who normally gives away $1,000 and, because of an incentive, increases that giving to $1,200. The money spent on the deduction for the first $1,000 is somewhat ineffective; the money spent on the last $200 is where the bang per buck is concentrated.

Second, the Internal Revenue Service (IRS) audits very few people, and the reporting system for charitable contributions is somewhat weak. IRS research clearly indicates that cheating is much more frequent when weak reporting systems are in place.

Floor on deductions

If a more universal deduction were combined with a reasonable floor applied to all taxpayers, much or all the revenue loss would be eliminated, as would many problems with additional noncompliance and complexity.

Taxpayers, for instance, might be allowed to claim charitable deductions greater than 1 or 2 percent of their adjusted gross income, regardless of whether they itemize. A modest floor would leave in place an incentive for all taxpayers, though they must give more than a modest amount to take advantage of it. Meanwhile, the subsidy for some of the first dollars of giving would be eliminated for everyone. Almost no matter how sensitive or insensitive taxpayers are to incentives, a revenue-neutral reform that exchanges fewer subsidies for the first dollars of giving in favor of more subsidies for the last dollars of giving would almost inevitably increase giving.

At the same time, such an approach would address concerns about administration and compliance by eliminating the need for IRS to monitor small givers, which it has not been able to do effectively.

A BETTER REPORING SYSTEM FOR CHARITABLE CONTRIBUTIONS

Expanding reporting requirements for charitable contributions would raise revenues. Congress occasionally has required increased reporting, as when it required charities to track and send letters to donors for contributions greater than $250. Yet no reporting goes directly to IRS, which over the years has increasingly relied upon document matching as perhaps its primary way of enforcing proper reporting of individual’s income tax liability. Various options include sending the IRS information already required for the letters to donors, or allowing an April 15 deduction option (see below) only for contributions directly reported to the IRS.

Raising the limit on the deduction

The TCJA raised the annual limit on deductible contributions from 50 to 60 percent of adjusted gross income in 2017 legislation. Another option would be to raise the limit even further or to expand the current carryover provision for excess contributions beyond the five years now allowed.

IRA rollovers

Yet another proposal would expand the charitable individual retirement account (IRA) rollover provision. More generous than an itemized deduction, this provision allows some taxpayers over age 72 years to donate up to $100,000 from traditional IRAs to charity without having to count the distributions as taxable income or separately take an itemized deduction for these contributions. (The RMD, or required minimum distribution, age used to be 70 years and 6 months, but following the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019, it was raised to 72.) Raising or eliminating the $100,000 annual limit on donations, lowering the age limit to 59 years and 6 months (the age at which IRA owners may withdraw funds without penalty), or allowing taxpayers to deposit such giving in donor advised funds (currently ineligible for such tax treatment) could increase charitable giving.

Foundation excise tax

Another option would eliminate or reduce the excise tax on foundation income, which would increase net assets used for charitable purposes. The current excise tax on income from foundation assets was initially intended to cover the IRS’s costs of overseeing the tax compliance of charitable organizations, but the monies were never appropriated for that purpose. For tax years beginning on or before Dec. 20, 2019, the excise tax is 2 percent of net investment income, but is reduced to 1 percent in certain cases. For tax years beginning after Dec. 20, 2019, the excise tax is 1.39% of net investment income, and there is no reduced 1 percent tax rate.

Allowing Charitable Deductions up to April 15 or Time of Filing Tax Returns

In the America Gives More Act of 2014, the House of Representatives passed a proposal, sometimes called the April 15 option, which would allow individuals to take charitable deductions up to April 15 or the time of filing tax returns. The proposal costs the government almost nothing if there are no increases in giving because it doesn’t really change the subsidy value of gifts already available. Thus, in terms of bang per buck, or increased giving per dollar of revenue cost, it ranks very high, because the incentive for the most part only loses revenues when there are additional gifts.

Economic and marketing evidence supports the notion that saliency matters: people would give more because they would be more aware of the size of the incentive, partly through the information tax return preparers and tax software developers provide.

CAPS ON CHARITABLE INCENTIVES

Prior to passage of TCJA, two proposals—a cap on total itemized deductions and a cap on the top rate at which deductions can be made—had been suggested to reduce incentives for charitable giving and raise revenues.

President Trump at one point proposed an overall cap on itemized deductions of $100,000 per single return and $200,000 per joint return. Higher-income taxpayers with mortgage interest, property tax, and other deductions in excess of such amounts would have been left with no tax incentives to give, while others would be left with a subsidy only for their first dollars of giving, up to the point they hit the cap.

A maximum cap on the tax subsidy rate for itemized deductions, proposed by President Obama, could also be reintroduced. Alternatively, in the presence of a universal deduction to nonitemizers and itemizers alike, the maximum cap could be replaced by a cousin, a maximum rate for that subsidy alone. For instance, if the top statutory tax rate is 37 percent but the maximum tax subsidy rate for deductible contributions is set at 27 percent, then the subsidy for those in that 37 percent bracket would be reduced by more than one-quarter. Because the cap applies to all additional giving, as opposed to be concentrated on the first dollars of giving, it would reduce total giving much more than many other types of limitations that raise the same amount of revenues, such as the floor discussed above.

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, though valuing the deduction on that basis alone treats charitable contributions and government spending simply as substitutes.

Further Reading

Bakija, Jon, Joseph Cordes, and Katherine Toran. 2013. “The Charitable Deduction: Economics versus Politics.” Washington, DC: Urban Institute.

Colinvaux, Roger. 2013. “Rationale and Changing the Charitable Deduction.” Tax Notes. March 25.

Colinvaux, Roger, Brian Galle, and C. Eugene Steuerle. 2012. “Evaluating the Charitable Deduction and Proposed Reforms.” Washington, DC: Urban Institute.

Congressional Budget Office. 2011. “Options for Changing the Tax Treatment of Charitable Giving.” Washington, DC: Congressional Budget Office.

McClelland, Robert, C. Eugene Steuerle, Chenxi Lu, and Aravind Boddupalli. 2019. “Tax Incentives for Charitable Contributions.” Washington, DC: Tax Policy Center.

Rosenberg, Joseph, C. Eugene Steuerle, Joycelyn Ovalle, and Philip Stallworth. 2016. “The New Debate over a Charitable Deduction for Nonitemizers.” Washington, DC: Urban Institute.

Steuerle, C. Eugene. 2013. “Tax Reform and Charitable Contributions.” Testimony before the US House Committee on Ways and Means, Washington, DC, February 14.

———. 2017. “Beyond the Charitable Deduction: How Congress Can Spur Giving.” Chronicle of Philanthropy, March 7.

———. 2018. “Charities Have Plenty of Opportunities to Advance Giving Despite Tax Law Losses.” Chronicle of Philanthropy, February 8.

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