Recent tax reforms in America will hurt charities
Article Published by: economist.com
DESPITE its oft-professed pro-market orthodoxy, America has always had an unusually large non-profit sector. Americans gave $390bn to charity in 2016, with the bulk of contributions coming from individual donors. Historically, revenues at non-profits tend to track GDP growth.
The recent tax reforms imply that despite strong economic growth, charitable contributions in America are poised to fall for the first time since the financial crisis.
The most significant threat to charities comes from changes to income tax. American taxpayers can choose either to “itemise” specific expenses, such as charitable gifts or mortgage payments, or take a “standard deduction”. In an effort both to simplify the tax code and to lower overall tax rates, the Republican-led Congress almost doubled the standard deduction to $12,000 for individuals and $24,000 for married couples. This will make filing taxes a lot easier for many. But it also means that far fewer Americans will have a financial incentive to donate money.
Charities, understandably, are worried. The Tax Policy Centre, a think-tank, estimates that the share of households claiming charitable deductions will fall from 21% to 9%. The decline will be especially steep for middle- and upper-middle-income households (see chart). Overall charitable donations are expected to fall by 4-6.5%, or $12bn-20bn. Research from the Lilly Family School of Philanthropy at Indiana University has reached similar conclusions.
Some non-profits will be hurt more than others. Middle-class families, whose tax incentives have changed the most, tend to give more to churches and local charities, such as soup kitchens, whereas the rich give more to universities. Differences in preferences can be stark. One survey from 2005 found that donations to religious institutions accounted for two-thirds of charitable contributions from households that made less than $100,000 a year, but only one-sixth of contributions from households making over $1m. Museum directors should be more worried about the gyrations of the stockmarket than any of the changes to income tax.
Charities will also be affected by other changes to the tax code. Cuts to the highest marginal tax rate for both individuals and companies will further reduce incentives to give. Moreover, fewer people will be affected by the estate, or inheritance, tax (though this provision, raising the threshold above which the tax is payable, is due to expire in 2025). Assessing the impact of this change is difficult. A rough analysis, also from the Tax Policy Centre, finds that a full repeal of the estate tax would lower charitable giving by a further $4bn a year.
The charitable tax deduction has long been controversial. It is, after all, in effect a subsidy that allows individuals unilaterally to direct government spending. The reforms could be seen as a partial victory for critics—tax deductions for charitable giving are expected to fall from around $63bn to $42bn. But tax subsidies for charity can also be seen in a positive light, as a decentralised way for those who hold minority beliefs to direct government funds. Rob Reich, a political scientist at Stanford University, notes one consequence of the tax reforms is that government subsidies for charitable giving will be further skewed towards the preferences of the rich.
About Jaime Bonetti Zeller
Jaime Bonetti Zeller is an investment professional and entrepreneur with businesses in multiple industries. He is president of Servicios Consulares Eurodom, the local partner in the Caribbean region for VFS Global, a leader global outsourcing and technology services specialist for diplomatic missions and governments worldwide. Jaime Bonetti Zeller also started the company Sofratesa de Panama inc., an organization in the engineering services industry located in Panama City.