Would Obama’s Plan to Curb Deductions Hurt Charities?

By :: March 3rd, 2009

Critics charge that President Obama’s plan to limit the value of itemized deductions to 28 percent would hurt charities at the time they most need financial support. Their argument: Since the maximum value of the deduction for donations to charity would fall from 39.6 percent to just 28 percent , the affluent will give less.  Republican Whip, Eric Cantor, asked, “Is there any better time to have charities in full throttle than when you have tough economic times?” 

How much would the proposal affect donations? A back-of-the envelope estimate suggests that the Obama plan would reduce annual giving by about two percent, or roughly $9 billion. Here’s how we got there.

The proposal would cut deductions for taxpayers in the top two tax brackets starting in 2011, when the top rates will be 36 and 39.6.  About 1.2 percent of households would be affected in 2011. 

Of course, higher income households donate more to charity than those with lower incomes, so the proposal affects a larger share of charitable contributions.  We estimate that 18.2 percent of charitable contributions itemized on tax returns are in the top two brackets in 2011.  Itemizers account for two-thirds of total charitable contributions in 2006, the latest year for which data are available.  Non-itemizers, bequests, foundations, and corporations—none of which would be affected by the proposal—account for the other giving.

Thus, limiting itemized deductions would affect roughly 12 percent of contributions.  Assuming that a one percent increase in the “tax price” of contributions induces a one percent cut in donations, this would translate into a $9 billion reduction in annual giving.  (See, e.g., this recent paper by Jon Bakija and Brad Heim for recent estimates of the elasticity of charitable contributions with respect to the tax price.)

That is not insignificant, although it is somewhat ironic that conservatives have only now discovered the virtues of high tax rates in boosting charitable contributions.  Researchers have found that the estate tax has much larger effects on philanthropy.  A 2004 CBO study estimated that repeal would have cut contributions by between $13 billion and $25 billion in 2000, but conservatives scoffed at the possibility of such behavioral effects.  Obama’s budget would retain the estate tax, which on net would likely boost contributions by more (compared with repeal) than limiting the deduction would cut them.

If we really want to unleash a flood of philanthropy, maybe the Administration should increase top rates even more and eliminate the deduction limit.  Assuming that contributions are sensitive to the tax price, this would unleash a flood of philanthropy and produce revenue for the Treasury at the same time.

Postscript:  Several readers have asked why our estimate of the effect on charities is different from the 1.3 percent change estimated by the Center on Budget and Policy Priorities.  The Center estimated the effect on current giving by comparing the effect of a top rate of 35 percent to an effective rate on contributions of 28 percent under the proposal.  They are effectively comparing 2011 to 2010.  I also estimate that change to be 1.3 percent under the assumptions described above.  The 2 percent estimate compares giving in 2011 under the proposal to giving in 2011 under current law, when the top tax rate is scheduled to return to 39.6 percent.

13Comments

  1. Anonymous  ::  4:57 pm on March 5th, 2009:

    In a scheme where most credits could be tranferred to a business income tax (an expanded Corporate Income Tax which is basically an invisible VAT), combined with a Simplified low rate Personal Income Tax, a charitable deduction would be essential (along with a credit for sales to a broad based ESOP and a credit for state income taxes paid – which would be modest). Of course, the more credits you include the higher rates must be.

  2. Anonymous  ::  9:41 pm on March 26th, 2009:

    One calculation above is unfounded sleight of hand. “Itemizers account for two-thirds of total charitable contributions in 2006″ is used as justification that the 18.2% of charitable contributions can be cut by 2/3 in doing the calculation. Yet it is ridiculous to assume/assert that the itemizers are uniformly distributed. In fact, almost all taxpayers in the top 10% itemize, since it is in their interest to do so, while it is from the bottom 50% of taxpayers where most of the non-itemizers come, as it is in *their* interest to do so. i don't have the figures, but I would asset that a) <10% of the affected top 2% do not itemize, and further that b) <3% of that top 2% WHICH IS MAKING CHARITABLE DEDUCTIONS do not itemize!
    Given this error, which alone would cause about a 50% increase in the estimated effect, I can only question how reasonable the other assumptions in the calculation are.

  3. Anonymous  ::  10:20 pm on March 26th, 2009:

    You misunderstand the calculation. I was not assuming that the likelihood of itemizing is uniformly distributed, which would be ridiculous (and I'd hope you'd trust me to know better). Let me try to go through the calculations again. Based on our preliminary estimates, $50.4 billion of charitable contributions will be reported on the returns of those in the top two brackets in 2011. We estimate that total itemized deductions will be $275.7 billion. $50.4 billion is about 18.3 percent of $275.7 billion. Of course, some contributions are made by non-itemizers, bequests, foundations, and corporations–i.e., not reported on income tax returns. Thus, total contributions are bigger. In 2006, itemized deductions were about 2/3 of the total. Assuming that is still true in 2011, total deductions would be $413.5 billion. $50.4 billion is 12.2 percent of $413.5 billion.
    (Note that we have updated these estimates to reflect the new CBO baseline. The updated estimates are here. This produces a significantly larger estimate of the share of contributions afffected because fewer people are on the AMT.)

  4. Anonymous  ::  9:38 pm on April 7th, 2009:

    Forgive me if this is a stupid question, I'm very much an economics novice. But, I'm confused…you cited the Bakija and Heim report, though it said in its conclusion: “We find strong evidence of timing behavior in response to predictable future changes in the price of giving only when the sample is limited to very‐high income returns (with
    average incomes over time in excess of $500,000)…”
    Aren't you being too lenient with their calculations by merely applying it to the two highest tax brackets with lots of people in them that make significantly less than $500,000?
    By the way, did the measure actually get defeated? I'm having trouble finding an answer on that. Did it get defeated or did it pass?

  5. Anonymous  ::  1:06 pm on April 8th, 2009:

    Austin, I think Bakija and Heim are referring to shifting contributions between years; e.g., I took a very large deduction for a business loss, which put me in a lower tax bracket so I'll defer my charitable contributions until next year when my tax rate (and the value of deductions) will be higher. My estimate is based on more of a long-run elasticity with respect to the tax price, which research suggests is about 1. (I.e., a 1% increase in price translates into a 1% decline in contributions.)
    The House and Senate budget resolutions, which are a blueprint for tax and spending bills to be taken up by the Congress, both left out the limit on itemized deductions. It is still possible that the provision might be included in future legislation, but it seems to have little or no political support in Congress.

  6. Anonymous  ::  3:58 pm on February 26th, 2010:

    i have heared about this plan and i condemned it i don`t know why these politicans dont get fear from God

  7. Pandaranol  ::  11:36 am on May 24th, 2011:

    A ne pas manquer

  8. free  ::  4:57 pm on June 4th, 2011:

    Thanks a lot for being my lecturer on this issue. I actually enjoyed your own article quite definitely and most of all cherished the way in which you handled the issues I widely known as controversial. You happen to be always quite kind towards readers like me and assist me in my existence. Thank you.

  9. It’s time to fix the charitable deduction | How to Give Money to charity  ::  11:50 am on November 27th, 2012:

    […] Of course, many donations do go to worthy causes, none of which deserve to be starved of funding. But there’s reason to believe that the charitable sector may be overstating the threat of a reduced tax break. Take, for example, the Charitable Giving Coalition’s recent letter to President Obama, who proposed a couple of years ago that taxpayer deductions be limited to a rate of 28%. The Coalition argued that “any cap or limitation on charitable deductions” would undermine giving, with “long-lasting negative consequences.” The Tax Policy Center has estimated that Obama’s proposal would reduce private giving by about 2%. […]

  10. The Deduction for Charitable Contributions: The Sacred Cow of the Tax Code? | Createquity.  ::  7:18 am on April 23rd, 2013:

    […] Len Burman of the Tax Policy Center and the Center on Budget and Policy Priorities came up with similar figures in 2009. […]

  11. Damon  ::  11:50 pm on March 11th, 2014:

    Hey I know this is off topic but I was wondering if you knew
    of any widgets I could add to my blog that automatically tweet my newest twitter updates.
    I’ve been looking for a plug-in like this for quite
    some time and was hoping maybe you would have some experience with something like
    this. Please let me know if you run into anything.

    I truly enjoy reading your blog and I look forward
    to your new updates.

    Here is my web blog … ira rollover, Damon,

  12. [Createquity Reruns] The Deduction for Charitable Contributions: The Sacred Cow of the Tax Code? | Createquity.  ::  8:35 am on July 23rd, 2014:

    […] Len Burman of the Tax Policy Center and the Center on Budget and Policy Priorities came up with similar figures in 2009. […]

  13. The Deduction for Charitable Contributions: The Sacred Cow of the Tax Code? | Createquity.  ::  3:38 pm on January 12th, 2015:

    […] Len Burman of the Tax Policy Center and the Center on Budget and Policy Priorities came up with similar figures in 2009. […]