March 8, 2001 | Executive Summary on Taxes
President George W. Bush's proposals to reduce marginal tax rates and eliminate the estate tax (the death tax) have raised the concern that gifts to charitable organizations could decline. The argument is that the value or actual "price" to the donor of charitable gifts that currently qualify for income tax or estate tax deductions is reduced because of the tax saving. The higher the individual's tax rate, the bigger the benefit of the tax break and thus, so it is said, the greater the inducement to give. The concern is that under the Bush plan, tax rates would be lowered, thereby lessening the tax savings and hence the incentive to give.
Despite large variations in federal tax rates over the past quarter-century, charitable donations as a percentage of personal income have remained remarkably constant. Although the top marginal income tax rate has ranged from 28 percent to 70 percent during this period, the amount that individuals donate to nonprofit organizations has remained relatively constant at around 1.8 percent of personal income.
The critical economic factor in the level of donations is income, not tax breaks. When the economy is strong, donations rise. Thus, with reductions in marginal tax rates stimulating the economy and personal income, the most likely result (and the historical pattern) would be an increase--not a reduction--in donations.
Professor Paul Schervish, who directs the Social Welfare Research Institute at Boston University, once opposed repealing the estate tax but now has changed his view. Data developed by the institute on a sample of individuals with assets of more than $5 million suggest that if estate taxes were reduced, most of the savings would go to a larger charitable contribution. As he writes in the January 11, 2001, issue of The Chronicle of Philanthropy:
Instead of resisting repeal, charities and fund raisers might do better to contemplate how to become effective in an environment in which contributions can flow to them through a far less circuitous and expensive route than what the estate tax creates.
Thus, if the philanthropic sector wants to see tax policy that will increase donations, it would be wiser for it to support tax changes that will boost the long-term growth of income and savings--such as rate reductions and the elimination of the estate tax--rather than opposing these changes in the Bush tax plan because of concerns that the benefits of tax deductions would be reduced.
Stuart M. Butler, Ph.D., is Vice President for Domestic and Economic Policy Studies at The Heritage Foundation.