Study: Eliminating Charitable Deduction Would Help Economic Growth

What are the effects of eliminating the income tax deduction for charitable giving?

This is one question the Tax Foundation aimed to answer as part an 11-part series of case studies  (opens in a new tab) examining the effects of proposed tax reform.

In their analysis, the study’s authors determined that eliminating the deduction would reduce employment and economic growth. But if the deduction were eliminated while at the same time instituting across-the-board individual rate cuts, employment, GDP, and federal revenues would increase.

According “The Economics of the Blank Slate  (opens in a new tab),” eliminating the deduction would:

• increase tax revenues by $39 billion on a static basis
• generate slightly less revenues ($30 billion) on a dynamic basis
• reduce GDP by $40 billion
• reduce employment by the equivalent of about 131,000 full-time workers
• reduce hourly wages by 0.2 percent.

Although getting rid of the deduction would increase the amount of taxes people pay if they make charitable contributions, the study found that eliminating the deduction and trading static revenue gains for individual rate cuts would have positive effects. According to the study’s authors, Tax Foundation Fellow Michael A. Schuyler and Senior Fellow Stephen Entin, such reform would:

• allow for an across-the-board rate cut of 3.7 percent
• boost GDP by $19 billion per year
• boost federal revenues by $4.5 billion on a dynamic basis
• increase employment by the equivalent of about 200,000 full-time workers
• reduce hourly wages by 0.1 percent.

“The difficult policy question, of course, is weighing these benefits against the social desirability of the charitable deduction,” Schuyler and Entin wrote. “Private charities are often more cost conscious, responsive, better targeted, and invite greater citizen participation than government outlay programs.”

Members of the Charitable Giving Coalition have estimated that for every $1 subject to the charitable deduction, communities reap up to $3 in benefits. Independent Sector has also estimated that annual giving could drop by as much as 36 percent  (opens in a new tab) [PDF] if the deduction were eliminated.

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