There have been a great many claims that the new tax bill passed by the GOP will have a chilling effect on charitable giving because it reduces the incentive represented by a tax deduction by increasing the standard deduction. In other words, fewer people will feel the need to itemize their deductions (particularly on the lower end of tax filers), and it’s only by itemizing that people get to count charitable deductions into the deduction mix.
You can find all sorts of estimates of the amount that charitable giving will supposedly be reduced as a result, but I have yet to see an article that explains exactly and in detail how those estimates are arrived at. In addition, quite a few of the slightly more detailed articles I’ve read were written after only the House version had been passed and therefore don’t reflect anything about the updated unified version that became law.
I’ve also read comments around the blogosphere and at news sites where many commenters give the impression that they think the GOP meanies have eliminated the tax deduction for charitable contributions, which is certainly not the case. To be fair, most of the articles try to make it clear that this is not the case, but apparently some people who read only the headlines have gotten the wrong impression, or just don’t understand the way tax deductions work (and on that last point I can sympathize).
But the bigger bucks donors will still have plenty of incentive to give to charity, since they will still be itemizing their deductions because they will have total deductions higher than the new standard deductions. And many small givers (like me, for example) rarely or never itemized because it wasn’t worth it to them, and yet many of them (like me, for example) nevertheless regularly gave money to charity. The fact that I couldn’t deduct that money didn’t mean that I didn’t give it. Nor did it mean I gave less.
I don’t think it’s possible to estimate how many people operate like I did, because their charitable contributions don’t appear on their tax returns.
The new standard deduction potentially handicaps only those charity-givers in the middle range of giving—that is, people who gave to charity under the old rules because their itemized deductions would then become higher than the old standard deduction (in 2017, $6,350 for a single and $12,700 for a couple). We don’t know (at least, I’ve never seen an article specifying) what percentage of charity-givers that represents or how much they now give.
Just as importantly, we don’t know why that group gave to charity or how their giving habits would change if they began to take the higher standard deduction rather than itemizing as they used to. In other word, how much did the fact that they could itemize those contributions determine whether they gave to charity and/or how much they gave to charity? Remember also that the new standard deduction level does not change the itemization picture for those who weren’t itemizing their deductions in the first place—who tend to be on the lower income end of things. Nor will it affect the people who were already itemizing deductions and will continue to do so—who tend to be on the higher income end of things.
For this middle group who used to itemize but now probably will take the standard deduction, will they actually contribute less to charity? In other words, were they giving to charity before only in order to get that higher deduction? Remember, these are not the big charity-givers—we’re not talking people who give $100,000 to charity a year. We’re talking about charitable contributions that are maybe in the few thousands range.
If you want to understand how a contribution of that sort used to affect a person’s taxes under the old rules, see this for example. It goes through the figures for a hypothetical single individual with an income of $50K who gave $9K to charity (that, by the way, is a MUCH higher percentage of income than most people give; it is not typical at all). The savings on that person’s taxes under the old rules would be $800, which is definitely something. But of course that would be offset by the $9K of the gift. In other words, the person gives a gift of $9K and yet it only costs the person $8.2K to do so. The tax deduction is nice, but the person’s income goes down $8.2K by giving that gift. Looking at that, one can only conclude that the person must be giving to charity because that person wants to give to charity, not because of the relatively small tax deduction the person ends up getting. Is the person giving more because of that $800 deduction than then he/she otherwise would? Perhaps, but there’s more to the picture. That “more” includes whether the person’s general tax burden is going up or down, and whether the person’s income and/or wealth is going up because of the improved economy.
Let’s say that same person gets a higher standard deduction under the new bill and perhaps even sees his/her taxes go down in other ways. I can easily see the same person giving exactly the same amount as before to charity (maybe even more) because he or she has more money now to begin with. I can also see people in the lower income levels, who perhaps didn’t give to charity before, starting to do so because they have more income to keep in the first place.
Not only might people tend to give to charity as the economy improves in general, but a big reason people do give is that they’re religious. They’re not going to lose that particular motive for charitable giving because of the new law, either.
For some unknown reason, donations from the middle class have decreased in recent years, even before this tax bill:
Data unveiled not long ago by Indiana University’s Lilly Family School of Philanthropy on its website, Generosity for Life, shows that volunteering and charitable giving overall has fallen 11 percent since the early 2000s. Another study, released last year by the Institute for Policy Studies, found that “while itemized charitable deductions from donors making $100,000 or more increased by 40 percent, itemized charitable deductions from donors making less than $100,000 declined by 34 percent”¦ According to one estimate, low-dollar and midrange donors to national public charities have declined by as much as 25 percent over the 10 years from 2005 to 2015. These are the people who have traditionally made up the vast majority of donor files and lists for most national nonprofits since their inception.”
There are a few possible reasons for this decline in giving. Secularization is one, but the bigger factor is probably that most U.S. households have experienced flat incomes for many years in an era of soaring inequality. Many people lost ground during the Great Recession and have not recovered. At the same time, housing and healthcare costs have soared. So it’s no surprise that ordinary folks don’t give as much as in the past; they can’t afford to.
It’s actually possible, IMHO, that these rates will increase rather than decrease if the economy keeps being strong and people have more money in their pockets. That’s true at many levels of income. I’m not saying this will happen. But I’m saying it’s highly possible.