October 18, 2011
The deductibility of charitable donations has been a feature of the U.S. individual income tax almost as long as the modern income tax has been in existence. Although the deduction encourages charitable giving, like other forms of preferential tax treatment, it results in a loss of revenue to the federal government. At current levels of charitable giving, the cost of that deduction—measured as the additional revenues that could be collected if the deduction was eliminated—will total about $230 billion over the five-year period from 2010 to 2014, according to the Joint Committee on Taxation.
This morning CBO’s Assistant Director for Tax Analysis, Frank Sammartino, testified before the Senate Finance Committee on the tax treatment of charitable giving. The testimony, drawn directly from a CBO study published in May, principally focused on how options for changing the tax treatment of such giving might affect the total amount of donations, the revenue loss to the federal government, and the distribution of tax benefits among different income groups. My blog post from May discussed those options in some detail. I thought I’d take this opportunity to describe patterns of charitable giving, another subject highlighted in the testimony.
Trends in Donations Over Time
Donations by individuals make up the majority of contributions to U.S. charities. According to the Center on Philanthropy at Indiana University, U.S. charities received a total of $304 billion in contributions in 2009 (equal to 2.2 percent of gross domestic product that year). Of that amount, $227 billion, or approximately 75 percent, was donated by individuals. The other 25 percent came from foundations, corporations, and estates (bequests).
From the mid-1960s to the mid-1990s, individual giving rose steadily, even after accounting for inflation. Over the following five years, such giving soared, growing by more than 60 percent between 1995 and 2000. That surge was probably tied closely to gains in the stock market. As the stock market declined after 2000, inflation-adjusted individual giving fell by 4 percent in 2001 and stagnated through 2003, before increasing by more than 13 percent between 2003 and 2007. With the recession and renewed decline in the stock market that began in late 2007, inflation-adjusted individual giving declined by almost 4 percent in 2008 and stayed flat in 2009.
Among people who filed tax returns, charitable giving averaged about 2.5 percent of income in 2008 (the latest year for which such information is available). That figure includes itemizers who deducted charitable donations as well as nonitemizers, whose charitable giving was estimated by CBO on the basis of surveys in which people report their contributions to charity. Giving as a share of income was fairly similar for most income groups in 2008, except for the highest-income taxpayers. Among people reporting more than $500,000 in adjusted gross income (AGI) that year, charitable giving averaged about 3.4 percent of income.
Higher-income households account for a significant portion of individual giving. People who reported AGI of at least $100,000 in 2008 were responsible for about 58 percent of charitable giving by taxpayers, although they made up less than 13 percent of tax filers. At the top of the income scale, less than 1 percent of taxpayers had AGI over $500,000, but they made 24 percent of the total charitable contributions by taxpayers in that year.
Recipients of Donations
Data from tax returns do not identify the different organizations to which individuals make donations. Instead, researchers in one study examined patterns of household giving using surveys by the University of Michigan and Bank of America. They found that, in general, the higher a household’s income, the smaller the share of donations that went to religious causes and the larger the share that went to causes related to health, education, and the arts. For example, among households with AGI below $100,000, 67 percent of giving was directed toward religious organizations, and only 7 percent went to institutions that focus on health, education, or the arts. Among households that reported at least $1 million in income, the situation was reversed: Just 17 percent of donations were made to religious organizations, and 65 percent were made to support activities related to health,education, or the arts.