Are Americans more charitable when they receive an income tax deduction for charitable contributions? That question has been argued ad nauseum since tax cuts in the Reagan Administration. Conclusions have been drawn on both sides, and there doesn’t seem to be a single answer. (Perhaps it is just too personal?)
The U.S. Tax Code has long provided an incentive for charitable givers, in the form of an itemized tax deduction for contributions to eligible charities. For taxpayers who itemize deductions on their returns, this directly decreased their tax bill. Was that tax deduction the reason these people supported their charities? Would they continue to give if that deduction were eliminated?
In the 1980s, many people objected to Reagan’s proposed dramatic tax rate cuts. Whether representing reasoning or rhetoric, the claim was that charitable contributions would be less financially rewarding, and therefore would shrink.
Did that happen? Actually, no it did not. Charitable contributions rose following the tax cuts. Presumably, this was the result of the “wealth effect,” meaning that good people found themselves with more disposable income. They continued to be willing to give, and apparently many were also feeling more able to part with their “extra” cash.
In the Tax Cuts and Jobs Act of 2017, a larger Standard Deduction was designed to eliminate itemizing deductions for many taxpayers. The effort was successful, in that only about 13% of taxpayers are expected to itemize on their 2018 returns, down from 30% the prior year. What will happen to charitable deductions remains to be seen when the 2018 statistics become available.
What if contributions do fall, as I expect that they will? (It is not the 80s any more.) Apparently, we are not alone, as two Members of Congress have addressed that very possibility by introducing the Charitable Giving Tax Deduction Act. The proposed Act would allow all taxpayers to take an itemized deduction, essentially adding all charitable deductions to the Standard Deduction amount. Chris Smith (R-NJ) and Henry Cuellar (D-TX) co-sponsored the bill.
For better or worse, Congress has long used tax policy to promote desired taxpayer behavior. As the old adage goes, if you want less of something, tax it, and if you want more of something, un-tax it. Smith and Cuellar appear to want a more charitable citizenry. We applaud them.
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