How to Increase Charitable Giving and Revenues at the Same Time

Budget reformers often try to achieve deficit reduction by simply stacking up a bunch of expenditure cuts and revenue increases.  Unfortunately, such an approach tends to avoid the systemic types of reforms that might make programs work better and save costs at the same time.  Here’s one example from the charitable contribution deduction, taken from one of my testimonies.

The chart below shows several types of potential changes to charitable tax law—credits, caps on deductions, a floor under which deductions wouldn’t be allowed, and a floor combined with an additional incentive for non-itemizers who cannot currently use the deduction—such that each would increase government revenue by about $10 billion.  Regardless of whether one believes that people have low or high response rates to the charitable incentive, it demonstrates that different proposals can have the same revenue effect but dramatically different effects on giving.

Source: Urban-Brookings Tax Policy Center Microsimulation Model (version 0411-2).
Note: The “low response” category uses a price elasticity of charitable giving of -0.5, and the “high response” category uses an elasticity of -1.0.

The last option—an “above-the-line” deduction with the 1.7% floor—ends up raising about $10 billion without reducing charitable giving at all.  With a smaller floor, both charitable giving and revenues could be increased.  At the other extreme, a refundable 15.25% credit raises $10 billion but ends up forcing an estimated loss of between $3 and $5.4 billion in charitable giving.

Note how combining options creates new possibilities.  For instance, extending a deduction to non-itemizers by itself might be considered poor tax policy since it is believed to cost significant revenues per dollar of charitable pick-up.  And it could add significantly to IRS compliance costs.  But if combined with a floor on giving, the package could easily be designed to increase both revenue and charitable giving without adding to those IRS costs.

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