It is almost axiomatic that any government policy, however
well-intended, will be subject to the Law of Unintended Consequences. This
maxim holds that any action, especially those mandated by government, will have
effects that reach beyond its intended purpose. One of the unintended consequences
of the new tax reform law may be a detrimental effect on charitable giving.
Like many Americans, I was not fully aware of the effects of
tax reform until I did my taxes. One of the most visible changes for individual
filers is the increase to the standard deduction. Under the new rules, the standard
deduction was almost doubled, increasing from $6,350 to $12,000 for single taxpayers
and from $12,700 to $24,000 for married couples filing jointly.
In practical terms, this means that I had a pile of receipts
that I didn’t need since the standard deduction was worth more than my itemized
deductions. In most respects, this is a great thing for taxpayers because it
simplifies preparing for and filing your taxes. In most cases, filling out a
tax return is going to be as simple as filling out your income and taking the
Nevertheless, it did leave me wondering about how the change
would affect charitable giving. Many people give to charities to get the tax deduction.
The logical question is if people don’t get a tax benefit from charitable
giving when they take the standard deduction, will they continue to give to
Giving to charity to save on your taxes was never really
quite as good an idea as many people thought. This is because in the past charitable
donations counted as a tax deduction rather than a tax credit. This means that
donations only affected the amount you paid in taxes indirectly. A tax
deduction reduces the amount of taxable income, which in turn reduces the
amount of tax that is owed.
The benefit of a tax deduction depends on a taxpayer’s
personal circumstances, but a $1,000 tax deduction for a filer in the old 24
percent tax bracket would reduce the taxes owed by $240. In contrast, a tax credit
directly reduces the taxes owed on a dollar-for-dollar basis. If you qualify
for a $1,000 tax credit, you would owe $1,000 less in taxes. Because charitable
giving was a deduction rather than a credit, givers didn’t get a full refund on
their giving at a tax time, but it did help.
The flip side to the argument is that millions of taxpayers
were already taking the old, lower standard deduction and they still gave to
charity. In the past, taxpayers who didn’t have large deductions such as
mortgage interest might well have not had enough deductions to make itemizing
practical. The impact of tax reform on charitable giving would most likely
affect middle-income donors who had enough deductions to itemize under the old
law but not enough under the new tax reform.
The effect of the change will depend on how Americans view
charitable giving. Do they give primarily to reduce their taxable income or do
they give because generosity blesses both the giver and the recipient?
Many Americans have religious motives for giving to charity.
About 80 percent of Americans identify with some religion per Gallup.
Of these, about 70 percent are Christian, Jews and Mormons account for about
two percent each and just under one percent are Muslim. All four faiths
encourage adherents to give charitably. In particular, the Bible
teaches believers to tithe, to give 10 percent of their earnings to support
churches and the needy. Americans who take religious commands seriously are
likely to keep giving even if it doesn’t change their taxes.
Another unintended consequence of tax reform on charitable
giving is that there might be a movement away from government-approved
charities to more direct giving. Rather than giving to charities that provide them
with a tax-deductible receipt, more people might give directly to those in need.
For example, a few years ago a friend wanted to fund a scholarship for a needy
black student. He set up the donation through a church in part to reap the
benefits of the tax-deductible contribution. Under the new rules, he might do
just as well to write a check directly to the recipient.
So far, the effects of tax reform on charitable giving
appear to be small, but Americans are still learning about the new law. CBS
News reported in June 2018 that total revenue to nonprofits fell 2.4
percent in the first three months compared to 2017 while the total number of donors
fell by 6.3 percent.
“We know that the main reason why people give to charity is
not the tax incentive,” Steve Taylor, United Way Worldwide senior vice
president and counsel for public policy said at the time. “We also know that
the tax incentive allows people to give a little bit more than they would have
otherwise. What you have is tens of millions of people who will give a little
bit less, and that adds up to tens of billions of fewer dollars given to
We won’t know for several years exactly how changes to the tax law affect charitable giving. When the tax returns are filed and examined this year, new data will be available on how donations in 2018 differed over previous years. However, differences in returns this year may cause taxpayers to make changes in their behavior going forward, but those changes won’t be evident immediately. It will be interesting to watch and I’m sure that it will make a great research topic for some economist.