April 22, 1999 | News Releases on Taxes
WASHINGTON, APRIL 23, 1999- Heritage Foundation Distinguished Fellow Elaine L. Chao, former president and CEO of the United Way of America and director of the Peace Corps, says adoption of a flat tax "will increase economic growth, personal income, savings and net wealth, all of which lead to higher levels of charitable giving."
Chao's analysis is contained in a new Heritage Foundation book, "The IRS v. The People: Time for Real Tax Reform."
Americans have always given generously to help those in need, says Chao. Charitable giving "blossomed before there ever was an income tax," she says, and even the 70 percent of taxpayers who do not itemize deductions-and therefore get no tax benefit from their donations-give generously to charitable causes.
The flat tax actually will be good for charities, Chao says, "because it will eliminate features of the tax code that hinder economic expansion, wealth creation and income growth." With "a bigger economic pie," charities will "get a larger slice," she says.
Historical data show charitable giving is closely tied to income growth, not to rates of taxation or the availability of a tax write-off, Chao says. Increased personal income leads to increased contributions. The weak economy during the recession of the early 1990s, for example, yielded stagnant growth in giving; as the economy improved, donations increased dramatically.
As a percent of personal income, charitable giving remains constant, despite wide variations in the income tax. Although the top income tax rate has ranged from 91 percent to 28 percent in the last 50 years, individual contributions to non-profit organizations have remained relatively constant at about 1.8 percent of personal income. In fact, the Reagan tax rate cuts in the early 1980s and the tax reduction and simplification bill of 1986 produced an increase in charitable giving, despite the reduced value of donors' tax deductions for those contributions.
On the basis of that evidence, Chao says allowing Americans to keep more of their earnings will stimulate charitable giving, and "donations to religious organizations and those engaged in human service and welfare activities directly are likely to increase the most."
In addition, factors such as religious participation, marital status, age, and being asked to contribute weigh much more heavily in individual decisions to give to charity than do tax considerations, Chao says.
Retaining the charitable deduction while adopting an otherwise flat tax, she says, would require a higher overall tax rate, slowing economic growth and curbing increases in personal income, savings and net wealth.