Charitable gifts and tax incentives: a close connection

The connection between charitable giving and tax write-offs shows the complexity of human motivations. On the one hand, many people are altruistic and enjoy helping others and the wider community by giving gifts to charities that perform various forms of service.

On the other hand, though, the ability to take a tax deduction or get a tax credit for the money given to charity is also a strong incentive for people to make those gifts.

In this post, we will look at recent research indicating that removing or reducing those incentives to give can negatively impact the amount of charitable giving.

An economics professor named Jon Bakija examined the effect on charitable giving of tax deductions and credits for charitable giving on individual income tax returns.

The professor found that tax deductions and other incentives to give lead to increases in the amount of charitable giving. Indeed, he estimates that the amount of additional giving stimulated by the incentives is comparable to the amount of tax revenue that is not generated due to the credits or deductions.

This effect is particularly pronounced, the professor found, for giving by high-income people.

It is also a reality, however, that both the federal government and the states are badly in need of additional tax revenue. And so there are various proposals in play to cap or even get rid of some types of charitable tax deductions.

In fact, in some states proposals have actually turned into legislation to change the way charitable deductions are handled.

In Michigan, for example, an overhaul of the state tax law on charitable gifts two years ago removed most tax deductions for charitable gifts. Advocates for food banks and other charities say, however, that their donations are down as a result of the tax change.

Source: USA Today, “Charitable giving tied to state tax write-offs,” Elaine S. Povich (Pew/Stateline), Sept. 24, 2013