Would Americans Make Charitable Donations Without Tax Incentives?

Tax incentives may not be as vitally important to giving as researchers and policymakers originally thought. Classic studies on how changes in tax incentives impact donors’ giving in the following year found rather substantial effects: A 50 percent increase in the price of a donation – that is, the amount of money donors give minus the amount they receive as income tax deductions – decreased donations by up to 125 percent.¹

These short-term studies, however, failed to take into account the fact that donors often return to their original levels of giving once they get used to new tax laws. More recent studies that take a longer view find that tax incentives play a smaller role in motivating charitable donations, with a 50 percent increase in the price of donations decreasing charitable contributions over the next two to three years by as little as 25 percent.²

How much tax incentives matter also depends on who donors are. High-income donors seem to be more responsive to tax incentives than low-income donors. Economist Laura Tiehen, for example, reports that over 50 percent of donors with incomes over $100,000 cite tax incentives as a motivation to give, while only about 30 percent of donors with incomes under $50,000 cite tax incentives as a motivation to give.³

Some organizations are more affected by changes in the tax code than others. Charitable giving to educational institutions and hospitals is quite sensitive to policy changes, reports Martin Feldstein, a professor of economics at Harvard University.⁴ He estimates that if income tax deductions for charitable contributions were eliminated altogether, contributions to educational institutions and hospitals would drop 40 percent to 65 percent. In contrast, religious organizations are minimally influenced by tax incentives. Feldstein speculates that eliminating tax deductions would reduce giving to them by only 7 percent to 13 percent.

1 Boskin, M.J. & Feldstein, M. Effects of the Charitable Deduction on Contributions by Low and Middle Income Households: Evidence From the National Survey of Philanthropy (1978).

2 Barrett, K.S., McGuirk, A.M., & Steinberg, R. “Further Evidence on the Dynamic Impact of Taxes on Charitable Giving,” National Tax Journal 50 (1997): 321-334.

3 Tiehen, L. “Tax Policy and Charitable Contributions of Money,” National Tax Journal 54 (2001): 707-723. Retrieved Aug. 28, 2005, from http://ntj.tax.org/.

4 Feldstein, M. “The Income Tax and Charitable Contributions: Part II – The Impact on Religious, Educational, and Other Organizations,” National Tax Journal 27 (1975): 209-226.

Read more stories by Rob Reich.