Individual giving to charities would drop by more than 4 percent overall if the charitable deduction were capped at 28 percent for the nation’s highest earners, but secular giving would dip by more than 7 percent as a result.
The American Enterprise Institute (AEI) estimated the effects of capping the charitable deduction in a study released today, “Give til it hurts?: The Great Recession, tax policy, and the future of charity in America.”
The 4.35 percent dip in giving would equate to a decline of $9.4 billion in the first year, based on Giving USA’s estimate of $218 billion in individual giving in 2011. The top 1 percent of earners would reduce giving by 24 percent while taxpayers who itemize would reduce giving by 9.3 percent. Religious giving would see the smallest effect, a drop of 0.95 percent, but secular giving would dip by 7.02 percent.
“Americans aren’t giving like we used to and policy makers need to take that into account,” AEI President Arthur C. Brooks said in a video accompanying the study’s release. “Tax reform is a complicated business. We owe it to Americans to separate the data from the special interests and see how a charitable deduction cap would affect nonprofits,” he said.
The Washington, D.C.-based conservative think tank also estimated what effect The American Taxpayer Relief Act of 2012 might have on donations by high-income households. Signed into law in January 2013 by President Obama, the measure increased the top marginal personal income tax from 35 percent to 39.6 percent for those earning more than $450,000.
Only 0.51 percent of families have income affected by the increase and also itemize deductions. For a family earning $1 million in annual income with charitable contributions of $20,000 (2 percent), the net effect on giving was estimated to be more than 19 percent, or an additional $3,903.
“Given the nature and magnitude of the income and price effects, this is completely predictable,” according to the study. “The net effect of the tax increase is an increase in total giving of about 1.13 percent because the policy change affects only about one half of 1 percent of taxpayers.”
The tax increase will reduce disposable income by 2.53 percent, or $25,300, for the $1-million family. The income effect on giving is predicted to be -1.6 percent, or -$320, while the price effect is predicted to be +21.12 percent, or +$4,223. So, the net effect on giving is estimated to be 19.15 percent, or $3,903.
For an itemizer at the top marginal rate, this means a tax price increase of 10.8 percent (from the previous top rate of 35 percent), or 19.2 percent (from 39.6 percent). “In this case, there is only a price effect because the tax rate has not risen or fallen; only the tax price has risen.”
In the example of a family earning $1 million, after the tax increase, they are giving $23,903 but the new price effect on giving will be -57.3 percent, or -$13,699, for a new giving level of $10,205.” This example is especially pronounced because it centers on the small percentage of the population: extremely high earners who itemize,” according to the study.
“Wall Street may be doing fine but America’s nonprofits are still hurting. The recession and weak recovery pushed down incomes, at the same time, the volatile policy environment has kicked up uncertainty about where tax law is going,” Brooks said. “America badly needs flatter fairer tax code. If tax reform sparks stronger economic growth, the nonprofit sector would benefit along with everyone else. But there’s still no doubt, the deduction cap would have dramatic effect on giving.”