Designing an Effective and More Universal Charitable Deduction

Because of the small share of the population currently eligible for itemized tax deductions for charitable giving, many charities have argued that a more universal charitable deduction or tax credit should exist. A more universal subsidy could (but would not necessarily) increase significantly the resources made available for charitable purposes and would symbolize the nation’s commitment to giving as a strong societal goal. In this brief, we show that whatever the revenue cost associated with a more universal deduction, policymakers should consider how to maximize the amount of goods and services that can be provided efficiently and equitably to charitable recipients for the subsidies it provides. Setting a floor contribution level above which some tax subsidy would be provided is a primary way of achieving that objective. Other approaches, such as allowing deductions up to the time of tax return filing (as with deductions for contributions to individual retirement accounts) and strengthened reporting, can also increase the amount of resources flowing through charities to beneficiaries for each dollar of subsidy provided.