Study: Charitable Giving Could Fall By 4 Percent With Deduction Cap

New research by the American Enterprise Institute found that the proposed cap on the tax deduction for charitable donations could result in a loss of about $9.4 billion in charitable giving in the short run.

Charitable giving could decrease by as much as $9.4 billion should a cap on charitable deductions be implemented as part of a tax reform package, according to a new study by the American Enterprise Institute [PDF].

Based on the Giving USA estimate that individual giving came to approximately $218 billion in 2011, we can calculate a total loss of giving from this cap of about $9.4 billion in the first year.

“The 28 percent cap could be expected to lower total charitable giving in the short run by 4.35 percent [all other things being equal],” Arthur Brooks, AEI president and the study’s author, wrote of the cap President Obama proposed in his fiscal year 2013 budget. “Based on the Giving USA estimate that individual giving came to approximately $218 billion in 2011, we can calculate a total loss of giving from this cap of about $9.4 billion in the first year.”

Released last week, the study—“The Great Recession, Tax Policy, and the Future of Charity in America”—analyzed Americans’ income as well as the price of giving during the Great Recession (2007-2009) to determine its impact on U.S. giving as well as how changes in tax policy could affect charitable donations in the future.

“The estimates show that donations are indeed less responsive to income and the price of giving than in the past,” Brooks wrote. “These results yield implications for both policy and management.”

A major caveat to these predictions is the dynamic economic effects of tax reform, wrote Brooks, who pointed out that some believe a cap on deductions would improve economic efficiency and stimulate growth—therefore lessening the effects of lost charitable giving. Over the long run, behavior could also change, and charitable giving could revert to historical norms.

Earlier this year, a study released by the Tax Foundation, a nonpartisan tax research group, found that by eliminating the charitable deduction—while at the same time instituting across-the-board individual rate cuts—employment, GDP, and federal revenues would increase. The policy question would then become weighing these benefits against the potential for lost social good that the deduction supports, the study authors wrote.

Steven Woolf, senior tax policy counsel for the Jewish Federations of North America, said the issue of whether or not to eliminate the charitable deduction is much broader than an economic story. JFNA is a member of the Charitable Giving Coalition—a group of nonprofit organizations, including ASAE, committed to preserving the charitable deduction in its current form.

“It’s who we take care of, the meals we provide for those that otherwise wouldn’t have a meal, the shelter we provide, the vocational services that we provide, job training in today’s economy, the cultural opportunities that we provide in terms of the arts, the healthcare services we provide to the most vulnerable among us,” Woolf told Associations Now earlier this year. “Just look at the breadth of what the sector does, and I don’t think it’s just a dollars-and-cents story.”


Katie Bascuas

By Katie Bascuas

Katie Bascuas is associate editor of Associations Now. MORE

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