Charitable Contribution Deductions as a Percent of GDP

The chart below is part of the Tax Policy and Charities Project, an Urban Institute project analyzing the interactions of nonprofits and tax policy. This graph, drawn from Statistics of Income (SOI) data, shows the amount of charitable contributions that appear on individual tax returns from 1929 to 2009 as a percent of GDP. Note that this data is taken from US tax returns and thus only includes contributions reported by individual taxpayers who itemize and thus can claim the charitable deduction. Giving USA found that in 2009 total charitable giving was $280 billion; this includes giving by non-itemizers, corporations, foundations, and bequests. If only giving on itemized individual tax returns was included, this would have been only $164 billion or 59 percent.

Charitable contribution deductions rose in the post-World War II era with the increase in percent of the population paying taxes, bobbed around with the percent of taxpayers who itemized deductions over time, and, more recently, rose and fell with the stock market. Over the three years (2007-2009) noncash gifts of property particularly fell after a significant rise earlier in the decade.

For more graphs and tables on charitable giving, see the data section of the Tax Policy and Charities website.

Amount of Charitable Contributions Deducted on Itemized Tax Returns as a Percent of GDP

Source: IRS Statistics of Income Division, Table 2.1, 2011 and previous years; U.S. Department of Commerce: Bureau of Economic Analysis, National Income and Product Accounts Tables, Table 1.1.5, 2011.

Note: Because this data is taken from tax returns only charitable giving from itemizers is included. Percentages were found by dividing total amount of contributions in a given year by U.S. GDP in nominal dollars.

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.

What Opportunities do Michael Vick, David Robinson, and Ted Leonsis Have in Common?

I really don’t understand it. Famous athletes have such golden opportunities to score big off the playing field. Yet, most just sidestep opportunities lying right at their feet to use their money for the common good, to teach by example that there’s far more to the game of life than riches and fame.

Footballer Michael Vick, baseballer Alex Rodriguez, and golfer Tiger Woods have been highlighted in broadcasts lately, having come back to their games after losing “hero” status by harming their families, friends, teams, fans, and sports. Perhaps the greatest cost of their prior actions was movingly stated by Frank Deford, when he asked if young fans today had anyone to look up to.

These fallen superstars can’t undo their words and deeds any more than the rest of us can. But while we wish them success, their messages to the young and their televised acts of contrition for off-the-field behavior could be made a lot more meaningful if they simply offered to devote themselves and their money to a good cause, especially those who have so much more than anyone needs to live really, really well.

Of course, the ideal place to start down this path is before a fall. And the likeliest candidates to use large chunks of their money to do good may be those big leaguers who have always been good sports both on and off the field.

It may appear unfair to put so much weight on sports icons. Only a few rich people from all occupations give away significant chunks of their money. But there are exceptions besides the 40 American billionaires who just pledged to donate at least half their wealth to worthy causes. NBA legend David Robinson (San Antonio Spurs) is partnering with Living Cities to try to make celebrity-branded philanthropy more effective. And Kevin Johnson (Phoenix Suns), Jalen Rose (Detroit Pistons), and tennis star Andre Agassi have signed on to some worthwhile ventures, often with schools, though it’s hard to determine their individual contributions on the IRS forms charities file.

A friend of mine, now a foundation executive but once part of a major sports franchise, tells me that while some lesser-known athletes are charity minded, players have no incentive to take up strategic philanthropy. She could name numerous examples of one-offs, but not of athletes or athletes’ foundations that try to leverage their investments for a good cause over the long haul—say, to make a community, neighborhood, or group of children better off.

Those beneath superstar status, in fairness, have such short careers that they might not be thinking of philanthropy before they decide what to do next. Still, among the super successful, there are too few footsteps to follow.

Team owners could set the pace and precedent. I’m inspired by people like Ted Leonsis, a principal owner of the Washington Capitals and now the Washington Wizards. In The Business of Happiness, he lays out “giving back” and “higher calling” as two tenets for happiness. What could Leonsis and his own fallen superstar Gilbert Arenas ? who, in a recent Washington Post article, talked about regaining the “trust and love” of the fans – do together to reinvigorate his off-court career? Why couldn’t owners more generally channel some of their entrepreneurial spirit into well-designed options for players to start giving back?

Let’s start with contract negotiations. Why not offer and push a new optional clause, that, like bank deposits, automatically sends some significant portion of bonuses or salary to charities of the player’s choice? Not a hidden clause, but one of the two or three major agreements.

Some sports franchises do have foundations, and many have community relations departments. But without knocking holiday baskets, galas, sports camps, and so on, there’s little attachment to sustained good works.

A lot of celebrity philanthropy runs through agents. Couldn’t a couple of them become known as agents who help their clients accomplish major charitable feats? And can’t league offices do a bit more to move philanthropic efforts from symbol to substance?

Thinking boldly, why not exclude money earmarked in advance for charity from salary caps? Players would get more for themselves and their charities combined, charities would benefit, owners would have an honorable way around a salary cap, and the team would get kudos for community involvement. Pollyanna-ish? Suppose one team owner, agent, and player decided to test this out. Would the players association and other team owners, even if opposed, want to take a public stand against more money for charity?

Of course, all this is more complicated than I’m letting on. Many athletes get taken to the cleaners by their advisers, agents, and sometimes their own bad spending habits. Tennis star Bjorn Borg and boxer Mike Tyson had to declare bankruptcy, though planning for charity might have helped them manage other parts of their private portfolios better as well.

Legal and charitable tax issues come into play too, such as the 50 percent limit on charitable contribution deductions for individuals and the 10 percent limit for corporations. But these pose only a minor obstacle since they simply limit the amount of government subsidy, not the amount that individuals can give to charity.

The vehicles for giving are many. Athletes can give now, yet still take their time sorting through long-term charitable goals. Leaders of community foundations like Terri Lee Freeman of the Community Foundation for the National Capital Region and John Porter of ACT for Alexandria (Virginia) can show them nifty ways to give money to charity today to be reallocated later when their vision for their gifts firms up.

And this proposition is win/win. Players and owners both boost their own marketability and reputation through community involvement. What sports writers wouldn’t chase stories involving generous sums and lasting impact? Meanwhile, I personally know many of the country’s top charitable tax lawyers, some of whom would be glad to help out pro bono if it would increase giving and involvement in the community. (Hey! Hobnobbing with athletes-turned-donors provides a lot of in-kind benefits, including goodwill for the law firm!)

Why not give it a shot?

An Ever-More Charitable Society?

As time goes on, more conflicts seem to flair between charities and businesses. Just last year, the Senate Finance Committee and the House Ways and Means Committee began investigating questions ranging from whether nonprofit hospitals were really charitable to whether corporate-sized salaries for some foundation board members and charitable officers were excessive. At the same time, charities and businesses collaborate like never before. We’ve all seen credit cards bearing a charity’s good name, donations of business staff time for pro bono work, and corporate logos associated with nonprofit events. (My favorites are the Chick-fil-A Bowl, the Meineke Car Care Bowl, and the Pioneer Pure Vision Las Vegas Bowl. Somehow, Sin City doesn’t summon up the pure vision of pioneers for me, but hey, I guess it works for some people.)

These new business-charity collaborations and conflicts, and consequent legislative attempts to ensure that charities really are “charitable,” can be tricky. But before attempting to judge all these attractions and repulsions between the two sectors, let’s hold our peace and ask what is fostering these new relationships in the first place.

Put simply, Americans are becoming more charitable! More and more of our industries produce goods and services that potentially serve charitable purposes. And ever more adults are engaged in activities and occupations that can be either charitable or profitable.

This isn’t fairy dust descending from the jet stream. Our economy’s growth is mainly in health care, information services, and research, while information science and nursing rank among the fastest-growing professions.

Professor Joseph Cordes of George Washington University and I have studied data on output by industry and employment by occupation to figure out just how much charities and profit-making businesses are beginning to look like each other. Between 2004 and 2014, industries involving businesses that could organize as charities and pass the charitable purpose test are predicted to grow by almost 3.5 percent a year, compared with about 1 percent for all other industries. Similarly, occupations with a nonprofit bent will collectively grow by a whopping 23 percent over that decade, compared with about 13 percent for other types of employment.

A typical “do-gooder” 100 years ago might have been someone who worked in a steel mill or grain elevator by day and volunteered at an orphanage or looked in on shut-ins at night. That person’s counterpart today might be a computer scientist or advertising exec who works for a profit-making drug firm but e-mails technical advice throughout the day and evening to community nonprofit organizations.

If such trends persist, in a few decades we’ll find that most people in developed nations will produce services and products that could be produced as easily in the nonprofit as in the profit-making sector.

In this new AC/DC system, charities, government, and charitable watchdog groups inevitably will see opportunities and tensions proliferate. And as service and innovation incubate together, the never-bright line between what is charitable and what isn’t—determined in part by “charitable purpose” so health care and research qualify but manufacturing and entertainment don’t—will blur even further.

Meanwhile, competition will increase. Profit-making institutions will continue entering fields once left to nonprofits as rising fees and government payments make these forays more lucrative. Charitable contributions may continue to stay fairly constant as a percentage of gross domestic product, but charities will produce larger shares of economic output as long as they continue to collect more private and government fees in exchange for what they provide.

With all this in mind, think about the recent evolution of hospitals as a test case. With the significant expansion of health spending, it’s easy to understand how nonprofit hospital output has grown rapidly even while the share of hospital work supported by charitable giving has declined and competition from for-profit medical service providers has intensified. A further upshot has been congressional investigation of what makes a nonprofit hospital charitable, the reorganization of some nonprofit hospitals into profit-making ventures and vice versa, and a whole host of questions surrounding the future research and teaching capabilities of hospitals.

So here’s the rub—and the opportunity. These forces are probably unstoppable, but they must be channeled to maximize the public good. Tax laws governing charitable giving and charitable status must continually be reexamined, and consumer protection and tax laws must help protect the charitable purpose of our charitable contributions in this polyglot of joint ventures, marriages and divorces across sectors, selling of charitable names, and competition for status. As businesses and charities increasingly cooperate and compete to meet both public and private demand, we will spend more and more of our time providing and receiving services once defined as primarily charitable. Whether all these changes beget greater generosity is an open question.