The Heritage Foundation

News Releases on Taxes

March 9, 2001

March 9, 2001 | News Releases on Taxes

Heritage Study Shows Tax-Cut Plan Will Likely Boost Charitable Giving

WASHINGTON, Mar. 9, 2001-Some critics of President Bush's tax-cut package insist it will depress charitable giving, but a new Heritage Foundation paper shows that, if anything, it will make donations rise.

Tax-cut opponents argue that lowering tax rates reduces tax breaks for giving and, therefore, will lead to the decrease. But the top tax rate has ranged from 28 percent to 70 percent over the last 25 years with little or no effect on levels of charitable giving, says Stuart Butler, Heritage's vice president for domestic policy. Even if Congress decides to eliminate the estate tax, the measure non-profit corporations fear most, giving won't change significantly.

Butler offers several reasons for this "non-effect." For one, rising income influences the total level of contributions far more than tax rates, he says. The level of giving as a percentage of income and economic output has remained relatively constant for years. "Economic growth leads to higher donations," he says. "Thus, tax rate reductions that boost the economy, such as ones in Bush's tax plan, will also boost charitable contributions."

Second, history shows that those who say tax rate reductions cut donations are wrong, Butler says. In 1984, the first year President Reagan's historic tax rate cuts took full effect, charitable giving was almost 12 percent higher than it had been in 1980.

Eyeing Reagan's next round of tax reform in 1986, philanthropy experts again predicted donations would decrease, by $8 billion per year. Charitable giving did decrease slightly in the first year after the package took effect. But it had increased sharply the year before and did so again the year after-most likely, Butler says, because donors were adjusting their giving schedules to take advantage of changing tax policy. Between 1984 and 1989, total giving rose faster-not slower-than during similar periods.

Third, most donors give little consideration to tax policy in deciding whether or how much to give. "People donate to charity primarily for religious, civic or philosophical reasons," Butler says. "Corporations, for instance, donate for many reasons-general goodwill among the corporate executives, improved public image and because contributions in time and money have been shown to increase employee morale. What tax policy does is influence the timing and method of contribution, not the amount."

Personal income is a more reliable factor in measuring how often and how much individuals will give, he says. "Studies show that as households become less worried about their economic condition, their propensity to give increases dramatically," he says. "Donations tend to track economic conditions, which explains why donations usually increase in size and frequency in the wake of a major tax cut."

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