By Joanne G. Carman and Richard M. Clerkin
What is the relationship between taxes and charitable giving? The answer is not straightforward.
A PJ Snap Poll asked readers how increases in the 2013 payroll deduction and in the highest marginal income tax rates will impact their charitable giving this year. The answer for most of the 248 people who responded is – not at all. More than three-fourths of respondents will not change the amount they give.
This is consistent with what we know about charitable giving in the United States. Over the past 100 years, regardless of changes in tax rates (either increases or decreases) Americans donate roughly 2 percent of GDP annually.
Why might this be the case? From research, we know there are two competing factors that drive donation decisions in regard to changes in tax rates; price and income.
Price and Income The income tax rate affects the “price” of a donation. The higher the tax rate, the lower the price of the donation for people who itemize their deductions. For example, if a person donates $1,000 they reduce their taxable income by $1,000. If they are in the 15 percent tax bracket, their tax bill is reduced by $150, making the “price” of this donation $850. If a person is in the 35 percent tax bracket, this same $1,000 donation costs them $650.
However, people do not only respond to the tax price of giving when making donation decisions.
Tax rates also affect disposable income. The amount donated may change based on income changes. As tax rates increase, disposable income decreases, which should lead to decreasing donations.
Influence of Itemizing Deductions on Federal Tax Returns
Price and income effects can be seen in the responses to our PJ Snap Poll. Respondents were asked if they itemize deductions on their federal income taxes. Itemizers should be more responsive to changes in income tax rates than non-itemizers. Non-itemizers do not receive any tax benefits from making charitable donations. Among our respondents, 86 percent of non-itemizers and 76 percent of itemizers report they will not change the amount they donate because of changes in tax.
No non-itemizers report they will increase their charitable giving in the coming year, while some of the itemizers report they will increase their charitable giving. With the 2013 tax change, the actual cost to the itemizers of making a specific gift will be less this year than it would have been for the same gift last year. The price of giving is lower in 2013 for the itemizers. We also find evidence of an income effect in our respondents. Depending on their income bracket, between one-fifth and one-seventh of respondents report that they will decrease their giving as a result of changes in the marginal tax rates.
People give for more reasons than just the tax implications. Remember, 77 percent of respondents do not intend to change their behavior. They give to organizations they are deeply involved with, and will continue to do so, even when faced with changes to the price of giving. As one PJ Snap Poll respondent indicated, “I will concentrate giving to those entities with whom I have the most engagement and ongoing dialogue.”
Respondents have varied strategies for reallocating their lowered amount of giving. One respondent stated, “Church first, then others equally spread out.” Other respondents shared that they will focus their donations on nonprofits that have the largest local impact; one gave criteria of “locality, transparency of business operations, and focused theme of activism.”
Most of the respondents will not consider new requests. They want to strengthen relationships with nonprofits they already know and will give to them to get the biggest impact for their reduced donations.
Implications of Research on Tax Policy and Charitable Giving
Given the competing effects of price and income on giving, and the historical trend of Americans donating roughly 2 percent of GDP annually, marginal changes in income taxes will have marginal impact on total donations. In this time of change in tax rates, nonprofits should focus on building relationships with existing donors to help them further connect with the mission of their organizations and to further demonstrate they are good stewards of their donations.
For more information on the relationship between income taxes and charitable giving, please see: Charitable Giving and Tax Policy in the U.S and the second edition of Why Do People Give, in The Nonprofit Sector: A Research Handbook (Yale University Press).
Joanne G. Carman is an Associate Professor in the Political Science and Public Administration Department at the University of North Carolina-Charlotte. Her teaching and research focuses on program evaluation and nonprofit management, and she is the coordinator of the Graduate Certificate in Nonprofit Management. Richard M. Clerkin is an Associate Professor in the Public Administration Department at NC State University. His teaching and research focuses on philanthropy and management and he is the director of the Graduate Certificate in Nonprofit Management