The Heritage Foundation

WebMemo #117 on Taxes

June 25, 2002

June 25, 2002 | WebMemo on Taxes

Analysis of the CARE Act (S. 1924)



The Charity Aid, Recovery, and Empowerment (CARE) Act (S. 1924) offers generous tax incentives to increase private giving. However, CARE's tax incentives may not generate the increase in charitable giving the bill's authors envision.

Pros:

CARE enacts two important changes to tax law which are likely to increase charitable contribution because of their significant reduction in taxes and the potential for these groups to change giving patterns in a short time period.

  • Donations made from IRAs by individuals who are 67 or older would become tax-free.
  • CARE offers a two-year increase in the percentage of income that a corporation can deduct in charitable gifts (from 10 percent to 15 percent for 2003 and 2004).


Other tax incentives include: restoring the deductibility of charitable giving for individuals who use standard (non-itemized) deduction; relaxing limits on the deductibility of books, food, and bonds for corporate donors; and reducing the excise tax rate from 2 percent to 1 percent for nonprofit foundations and trusts.

Cons:

  • CARE overestimates the effect of tax breaks on donations for middle-class taxpayers. Charitable gifts are more responsive to after-tax income than direct changes in tax law (see Stuart Butler's "Why the Bush Tax Cuts Are No Threat to Philanthropy").
  • Title II of CARE creates individual development accounts (IDAs), with tax breaks for contributors who match a person's savings. Promoting savings and financial independence is both noble and feasible; however, funds in IDAs are restricted to buying a house, starting a business, receiving education and job training and exclude practical expenses such as medical care, transportation, and day-care needs.
  • Offering tax credits to banks for matching contributions to IDAs is unlikely to cause large financial institutions to give more.
  • Most tax deductions and rate changes revert back to current standards in 2004. Such short-term measures are unlikely to make a significant impact in the habits of those who give.

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