Study: Jobs Will Evaporate With Eliminated Deduction

Eliminating the income tax deduction for charitable donations would slow economic growth and reduce employment but if it were paired with an across-the-board income tax cut, that moderately negative economic outlook would turn slightly positive.

The results are part of “The Economics of the Blank Slate,” a series of 11 case studies by the Tax Foundation in Washington, D.C., created to discuss the economic effects of repealing various credits and deductions, all of which are considered “on the table” as part of a comprehensive tax reform effort in Congress. “Case Study #11: Deduction for Charitable Contributions” is authored by Tax Foundation Fellow Michael Schuyler, Ph.D, and Senior Fellow Stephen Entin.

Losing the charitable deduction would cause a slowdown in U.S. economic growth because it would increase people’s taxable incomes, pushing more of them into higher tax brackets, reducing incentives to work, save, and invest, according to the study. This estimate may actually understate the harm because the Tax Foundation’s simulation model does not estimate the social or other benefits in turn provided by the charities, hospitals, and educational institutions supported by donations.

If the revenue gain from eliminating the deduction were put back into an across-the-board cut in individual tax rates, however, the lower marginal rates would soften the tax system’s biases against investment and work, which would expand the quantities of both labor and capital and lead to more production, according to the paper.

Eliminating the charitable tax deduction would:

  • Increase tax revenues by $39 billion on a “static basis;”
  • Reduce GDP by $40 billion;
  • Generate slightly less revenues ($30 billion) on a “dynamic basis;”
  • Reduce employment by the equivalent of 131,000 full-time workers; and
  • Reduce hourly wages by 0.2 percent.

Eliminating the deduction and trading the static revenue gains for individual rate cuts would:

  • Allow for an across-the-board rate cut of 3.7 percent;
  • Boost GDP by $19 billion per year;
  • Boost federal revenues by $4.5 billion on a “dynamic basis;”
  • Increase employment by the equivalent of approximately 200,000 full-time workers; and,
  • Reduce hourly wages by 0.1 percent.

“Our model estimates that the combined effect of trading the charitable deduction for a uniform cut in marginal rates would add $19 billion to GDP (Gross Domestic Product) and, due to the positive revenue feedback, provide a small net gain of $5 billion in federal revenue. The difficult policy question, of course, is weighing these benefits against the social desirability of the charitable deduction itself,” said Schuyler.