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.
- Changes in tax rates have a surprisingly small effect on donations. Charitable organizations predicted that tax rate reductions in 1981 and 1986 would reduce giving. These predictions proved to be incorrect. According to Giving USA 2000, an annual report on philanthropy, by 1984, when President Ronald Reagan's economic plan was fully in effect, total charitable giving was 11.8 percent higher (accounting for inflation) than it had been in 1980. Between 1985 and 1989, contributions in inflation-adjusted dollars rose by 19.1 percent, slightly above the long-term increase for similar periods.
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.
- Worries about the impact of eliminating the estate tax are misplaced. Although changes in the death tax might alter the manner and timing of charitable contributions, it is unlikely that they would have any significant effect on total giving--except possibly to increase it. The professional economic research tends to support the hypothesis that households do not plan to consume all of their personal savings during their own lifetimes; instead, they expect to pass some savings on to their children, and only what is left over after this parental bequest--and after costs such as taxes are paid--is considered a "residual" for supporting charities. Thus, eliminating the death tax would actually increase the residual available for charitable bequests since the after-cost of planned contributions to heirs would be reduced.
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.