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VIIIOPTIONS FOR CHANGING THE TAX TREATMENT OF CHARITABLE GIVINGEffects of Policy Options on TaxSubsidies and Charitable DonationsAccording to CBO’s modeling, adding a contributionfloor to any of the approaches listed above would reduceboth the total federal tax subsidy and the total amountdonated to charity, relative to the same option without afloor. In each case that CBO examined, the reduction inthe subsidy (and thus the increase in revenues) wouldexceed the reduction in charitable contributions, whethermeasured in dollars or as a percentage change. The reasonis that introducing a floor would continue to provide atax incentive for additional giving above the level of thefloor and at the same time reduce the tax subsidy fordonations that people might have made even without atax incentive.3Allowing all taxpayers to claim a deduction for charitablegiving would have increased donations in 2006 by anestimated 2.0 billion (or 1 percent) and increased thetotal tax subsidy by 5.2 billion (or 13 percent) from the2006 amounts. Combining a deduction for all taxpayerswith a floor, however, could both increase donations anddecrease the tax subsidy. For example, such a deductioncombined with a fixed dollar floor of 500/ 1,000 wouldhave increased donations by 800 million in 2006 anddecreased the tax subsidy by 2.5 billion (see SummaryTable 1).Replacing the current deduction with a 25 percent taxcredit would increase donations and also increase the government’s forgone revenues. Combining such a creditwith certain contribution floors, however, could boostdonations while reducing the tax subsidy or coulddecrease donations by a small percentage while reducingthe tax subsidy by a large percentage. Setting the credit at15 percent would reduce donations but would reduce thetax subsidy by a larger amount (both in dollars and as apercentage change).Effects of Policy Options onVarious Income GroupsChanging the tax treatment of charitable contributionswould have differing effects on taxpayers at different3. The fact that some nonitemizers contribute to charities despitereceiving no tax benefits for doing so suggests that a substantialamount of charitable giving would still occur in the absence of atax incentive.CBOpoints on the income scale. Adding a contribution floorto the current deduction for itemizers would reduce taxsubsidies for all income groups, but for high-incometaxpayers, the size of the reduction would vary significantly depending on the type of floor used. For instance,augmenting the deduction with a fixed dollar floor of 500/ 1,000 in 2006 would have lowered the tax subsidyfor people with AGI over 100,000 by 0.08 percent oftheir AGI, whereas adding a floor equal to 2 percent ofAGI would have lowered the tax subsidy for that incomegroup by 0.30 percent of their AGI.Making the deduction for charitable contributions available to nonitemizers would benefit lower- and middleincome taxpayers, who tend not to itemize deductionsbecause their deductible expenses (such as mortgageinterest and state and local taxes, as well as charitabledonations) are not large enough to exceed the standarddeduction. Those groups would benefit even more if thecurrent deduction—which tends to help higher-incometaxpayers more because they face higher tax rates—wasreplaced with a nonrefundable credit that gave all incomegroups the same tax incentives for giving. For example,replacing the deduction with a 25 percent credit in 2006would have increased the tax subsidy for taxpayers withAGI below 100,000 by 0.27 percent of their AGI, but itwould have decreased the tax subsidy for people abovethat income level by 0.09 percent of AGI. Tax subsidieswould be lower for all income groups with a 15 percentcredit than with a 25 percent credit.Caveats About This AnalysisThe results of CBO’s policy simulations are meant tohighlight the general effects of the various approaches.The exact size of those effects, however, would depend onthe specific parameters of a policy—such as the level ofthe floor or the amount of the credit—as well as on theextent to which taxpayers would change the amount oftheir charitable giving in response to a change in the taxsubsidy. In addition, this analysis does not reflect many ofthe other ways in which taxpayers might respond to achange in their tax subsidy, such as shifting donationsbetween years. (In the appendix, CBO examines howsensitive the results of this study are to several differentassumptions, including variations in taxpayers’ responsiveness to changes in their tax subsidy and the possibilityof shifts in the timing of donations.)

SUMMARYOPTIONS FOR CHANGING THE TAX TREATMENT OF CHARITABLE GIVINGIXSummary Table 1.Summary of Total Donations and Tax Subsidies Under Current Law andEleven Policy Options, 2006Total Contributions(Billions of2006 dollars)Floor forEligible DonationsTax Subsidy(Billions of2006 dollars)Current LawDeduction Available Only to Itemizers203.0No floor40.9Change from Current LawKeep Deduction Available Only to Itemizers butAdd FloorOption 1Option 2 500/ 1,0002 percent of AGI-0.5-3.0-5.5-15.7Extend Deduction to All FilersOption 3Option 4Option 5No floor 500/ 1,0002 percent of AGI2.00.8-1.95.2-2.5-13.1Convert Deduction to 25 Percent NonrefundableCredit for All FilersOption 6Option 7Option 8No floor 500/ 1,0002 percent of AGI2.71.5-1.07.1-2.4-11.9Convert Deduction to 15 Percent NonrefundableCredit for All FilersOption 9Option 10Option 11No floor 500/ 1,0002 percent of AGI-7.8-8.6-10.0-13.3-19.0-24.6Source: Congressional Budget Office.Notes: The simulation results are for tax year 2006, and all figures are at 2006 levels. 500/ 1,000 500 for individual filers and 1,000 for joint filers; AGI adjusted gross income.CBO

Options for Changing theTax Treatment of Charitable GivingIntroductionTaxpayers who itemize deductions on their federalincome tax returns can reduce their tax liability bydeducting their donations to qualified nonprofit organizations—including organizations dedicated to religious,charitable, scientific, literary, or educational purposes.Both monetary contributions and the value of donatedfinancial assets or other property are deductible, subjectto certain annual limits (see Box 1). The tax treatment ofcharitable giving, which has evolved over time, providesvarious incentives for donations.Although corporations can also deduct their charitabledonations, this analysis focuses on contributions by individual donors. The study examines patterns of individualcharitable giving and finds that the majority of such giving comes from a small number of taxpayers with highincomes. The study also reviews concerns about the current tax treatment of giving and assesses how variouschanges to that treatment would affect the amount ofdonations made, the tax subsidies for them, and thedistribution of those subsidies by income group.History of Tax Incentives for Charitable GivingThe deduction for charitable donations is a long-standingfeature of the individual income tax: It was created in1917, just four years after the modern income tax began.1The amount of charitable contributions that could bededucted was initially capped at 15 percent of a taxpayer’sincome. In general, the deduction applied only to highincome people, because they were the only ones requiredto pay the income tax in its early years.During World War II, as the income tax expanded tocover three-quarters of the U.S. population, the standard1. The charitable deduction was enacted in the War Revenue Actof 1917.deduction was introduced as an option for taxpayers.2The deductibility of charitable contributions was thenlimited to taxpayers who chose to itemize deductions forspecific expenses they had incurred rather than claim thestandard deduction. (In determining the initial size of thestandard deduction, officials took into account a certaintypical amount of charitable contributions.)3Nonitemizers were allowed to deduct their charitablecontributions for a brief period during the 1980s. TheEconomic Recovery Tax Act of 1981 created a temporary“above-the-line” charitable deduction, permitting taxpayers who opted for the standard deduction to alsodeduct charitable contributions.4 That provision wasgradually phased in starting in 1982 and took full effectfor 1986, after which it was allowed to expire.Besides making charitable contributions during their lifetime, people can bequeath donations to charities fromtheir estates upon their death. Such bequests, althoughnot the focus of this analysis, can be deducted when2. The standard deduction makes tax filing simpler because taxpayers do not need to keep track of all of their itemized expenses.(Besides charitable donations, major expenses that can bededucted include mortgage interest, state and local taxes, andmedical costs that exceed a certain percentage of a taxpayer’sadjusted gross income.) In addition, the standard deduction lowers the tax burden for taxpayers who have small amounts of itemizable deductions. For 2011, the standard deduction is 5,800for single filers, 11,600 for joint filers, and 8,500 for heads ofhouseholds.3. See the statement of Congressman Willis A. Robertson, Congressional Record, vol. 90, 78th Cong., 2nd sess. (1944), p. 3973.4. From 1982 to 1984, the deduction was capped at between 50and 300. For 1985 and 1986, the cap was removed; instead,nonitemizers could deduct 50 percent of their charitable contributions in 1985 and 100 percent of their charitable contributions in1986.CBO

2OPTIONS FOR CHANGING THE TAX TREATMENT OF CHARITABLE GIVINGBox 1.Current-Law Limits on the Deduction for Charitable ContributionsUnder current law, deductions for cash donationsmay not exceed 50 percent of a taxpayer’s adjustedgross income (AGI). Deductions for donated property that has appreciated in value since it was initiallyacquired are generally limited to 30 percent of AGI.Although donations of appreciated property are subject to a lower percentage cap, to the extent that theyfall below the cap, they receive more-favorable taxtreatment than cash contributions do. The reason isthat taxpayers do not have to pay income tax on capital gains from appreciated property that they donate,even though they can claim the fully appreciatedvalue as a deduction. Deductions that are limited bythose percentage-of-income caps can be claimed infuture years (as long as total deductions in those yearsremain below the caps).determining estate taxes.5 Charitable giving during one’slifetime has advantages over bequests, however, because itcan decrease individual income taxes now as well as estatetaxes later (by reducing the size of the estate that is left)rather than just decreasing estate taxes.6How Tax Incentives Affect GivingBy allowing itemizers to deduct their donations, thegovernment indirectly subsidizes charitable activities. Forexample, someone in the 25 percent tax bracket faces anafter-tax price of only 75 cents when giving a dollar tocharity. In other words, a person in that bracket whodonates 1 to charity has his or her taxes reduced by25 cents, so his or her consumption and savings declineby just 75 cents. In general, the deduction lowers theafter-tax price per dollar of charitable contributions from 1 to 1 multiplied by the difference between one andthe marginal tax rate.Although the underlying motives for charitable givingare complex and not fully understood by economists,5. See Congressional Budget Office, The Estate Tax and CharitableGiving (July 2004).6. That statement is based on the assumption that earnings andconsumption behavior are not affected by whether donationsare made before or after death.CBOBeginning in 2013, with the expiration of the TaxRelief, Unemployment Insurance Reauthorization,and Job Creation Act of 2010 (Public Law 111-312),high-income taxpayers will be subject to an additional limit on deducting charitable contributions.At that point, if a taxpayer’s AGI exceeds a specificthreshold, total itemized deductions will be reducedby 3 percent of the income above that threshold (withthe total reduction limited to 80 percent of the sumof certain deductions). Because that limit is based onthe amount of income above the threshold, not onthe amount of itemized deductions, it will not affecta taxpayer’s marginal incentive to give an additionaldollar to charity.empirical studies generally find that taxpayers respond tothe after-tax price of giving to some degree. Such taxincentives are limited, however, to the subset of taxpayerswho itemize, and they favor high-income people, whoface relatively higher marginal tax rates. That situationraises several questions: Could tax subsidies for charitablegiving be extended to more taxpayers without costing thefederal government large amounts of forgone revenue?Could the subsidies per dollar of giving be made equal fortaxpayers across the income distribution? This studyexamines how policy options to address those questionswould affect donations, revenue costs, and the distribution of tax benefits.Patterns of IndividualCharitable GivingDonations by individuals make up the majority ofcontributions to U.S. charities. According to the Centeron Philanthropy at Indiana University, U.S. charitiesreceived a total of 304 billion in contributions in 2009(equal to 2.2 percent of gross domestic product thatyear).7 Of that amount, 227 billion, or approximately7. See Center on Philanthropy at Indiana University, Giving USA2010: The Annual Report on Philanthropy for Year 2009 (Chicago:Giving USA Foundation, 2010).

OPTIONS FOR CHANGING THE TAX TREATMENT OF CHARITABLE GIVING75 percent, was donated by individuals. The other25 percent came from foundations, corporations, andestates (bequests).Trends in Donations over TimeFrom the mid-1960s to the mid-1990s, individual givingrose steadily, even after accounting for inflation. Over thefollowing five years, such giving soared, growing by morethan 60 percent between 1995 and 2000 (see Figure 1).That surge was probably tied closely to gains in thestock market. As the stock market declined after 2000,inflation-adjusted individual giving fell by 4 percent in2001 and stagnated through 2003, before increasing bymore than 13 percent between 2003 and 2007. With therecession and renewed decline in the stock market thatbegan in late 2007, inflation-adjusted individual givingdeclined by almost 4 percent in 2008 and stayed flat in2009.Among people who filed tax returns, charitable givingaveraged about 2.5 percent of income in 2008 (the latestyear for which such information is available). That figureincludes itemizers who deducted charitable donations aswell as nonitemizers, whose charitable giving was estimated by the Congressional Budget Office (CBO) on thebasis of surveys in which people report their contributions to charity. Giving as a share of income was fairlysimilar for most income groups in 2008, except for thehighest-income taxpayers. Among people reporting morethan 500,000 in adjusted gross income (AGI) that year,charitable giving averaged about 3.4 percent of income(see Figure 2 on page 4).8Higher-income households account for a significantportion of individual giving. People who reported AGIof at least 100,000 in 2008 were responsible for about58 percent of charitable giving by taxpayers, althoughthey made up less than 13 percent of tax filers (see Table1 on page 5). At the top of the income scale, less than 1percent of taxpayers had AGI over 500,000, but theymade 24 percent of the total charitable contributions bytaxpayers in that year.Recipients of DonationsData from tax returns do not identify the different organizations to which individuals make donations.9 Instead,8. For itemizers, giving as a share of income is U-shaped: The givingrates at both ends of the income distribution are higher than thosein the middle.3Figure 1.Total Charitable Contributions byIndividual Donors, 1963 to 2009(Billions of 2009 rce: Congressional Budget Office based on data from theCenter on Philanthropy at Indiana University, Giving USA2010: The Annual Report on Philanthropy for Year 2009(Chicago: Giving USA Foundation, 2010).researchers in one study examined patterns of householdgiving using surveys by the University of Michigan andBank of America.10 They found that, in general, thehigher a household’s income, the smaller the share ofdonations that went to religious causes and the larger theshare that went to causes related to health, education, andthe 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 (see Figure 3 on page 6). Among households that reported atleast 1 million in income, the situation was reversed:9. The recipient organization is sometimes reported for donations byitemizers, but even in those cases, the fact that many organizationsserve multiple functions makes it difficult to categorize the contributions by type of recipient.10. See Center on Philanthropy at Indiana University, Patterns ofHousehold Charitable Giving by Income Group, 2005 (Indianapolis:Indiana University–Purdue University, 2007). In that study,estimates of giving by households with annual income below 200,000 were based on the Center on Philanthropy Panel Study,a module of the Panel Study of Income Dynamics conducted bythe University of Michigan. Estimates for households with annualincome above 200,000 were based on data from Bank of America’s Study of High Net Worth Philanthropy.CBO

4OPTIONS FOR CHANGING THE TAX TREATMENT OF CHARITABLE GIVINGFigure 2.Percentage of Income That Tax Filers Contribute to Charity, byIncome Group, 2008(Percentage of adjusted gross income)3.53.02.52.01.51.00.50Under 50,000 50,000 to 100,000 100,000 to 200,000 200,000 to 500,000Over 500,000Adjusted Gross IncomeSource: Congressional Budget Office based on data from Internal Revenue Service, Statistics of Income Division, Individual Income TaxReturns 2008 (revised July 2010); the Federal Reserve Board’s 2004 Survey of Consumer Finances; and the Bureau of Labor Statistics’ 2002 Consumer Expenditure Survey.Note: Includes CBO’s estimates of charitable contributions by people who filed income tax returns in 2008 but did not itemize deductions.Just 17 percent of donations were made to religious organizations, and 65 percent were made to support health-,education-, or arts-related activities.Concerns About the Current TaxTreatment of Charitable GivingThe present income tax treatment of charitable givingsubsidizes certain taxpayers’ donations to charitable organizations and activities. Although those donations aregenerally seen as benefiting all of society, concerns havebeen raised about the current structure of the federalsubsidy—in terms of the amount of forgone tax revenues,the incentives for donating, and the degree to whichtaxpayers respond to those incentives.Cost to the Government of SubsidizingCharitable ContributionsThe revenue cost to the government of the charitablededuction is not obvious from the total dollars donatedor deducted because the tax rate that would have appliedto the income had it not been donated (the marginal taxrate) varies greatly among individuals. The marginal ratecan even vary for the same person depending on howCBOmuch he or she donates. One way to estimate the revenueloss from charitable contributions is to simulate thechange in tax revenues that would result if there were nodeduction for charitable contributions and compare thatresult with actual revenues using a microsimulationmodel that can calculate the difference in taxes from arepresentative sample of tax returns. Using that approach,CBO estimates that the tax subsidy associated with thecharitable deduction totaled 40.9 billion for 2006.The subsidy for charitable giving is concentrated amonghigh-income taxpayers to an even greater extent thandonations are (see Figure 4 on page 7). Although taxpayers reporting adjusted gross income of at least 100,000accounted for 11 percent of tax returns and 57 percent ofcharitable contributions in 2006, they received 76 percent of the tax subsidy associated with charitable deductions. In contrast, taxpayers reporting AGI of less than 50,000 filed 66 percent of returns, accounted for19 percent of charitable donations, and received 5 percent of the tax subsidy for donations.11 The difference in11. Those numbers include CBO’s estimates of charitable contributions by income tax filers who did not itemize deductions.

OPTIONS FOR CHANGING THE TAX TREATMENT OF CHARITABLE GIVING5Table 1.Charitable Contributions, by Tax Filers’ Itemizing Status andIncome Group, 2008Adjusted Gross IncomeNumber ofTax Returns(Millions)Share ofTax Returns(Percent)Share ofTotal Income(Percent)Amount ofPercentage ofCharitableFilers withContributionsCharitable(Billions ofContributionsadollars) aShare ofCharitableContributions(Percent) aAll FilersUnder 50,000 50,000 to 100,000 100,000 to 200,000 200,000 to 500,000Over 173100ItemizersUnder 50,000 50,000 to 100,000 100,000 to 200,000 200,000 to 500,000Over 500,000TotalSource: Congressional Budget Office based on data from Internal Revenue Service, Statistics of Income Division, Individual Income TaxReturns 2008 (revised July 2010); the Federal Reserve Board’s 2004 Survey of Consumer Finances; and the Bureau of Labor Statistics’ 2002 Consumer Expenditure Survey.a. Includes CBO’s estimates of charitable contributions by people who filed income tax returns in 2008 but did not itemize deductions.the tax subsidy occurs because higher-income people aremore likely to itemize deductions (and thus to receive atax subsidy for

S-1. Summary of Total Donations and Tax Subsidies Under Current Law and Eleven Policy Options, 2006 ix 1. Charitable Contributions, by Tax Filers' Itemizing Status and Income Group, 2008 5 2. Tax Filers, by Highest Marginal Tax Rate, 2008 8 3. Total Donations and Tax Subsidies Under Current Law and Eleven Policy Options, 2006 10 4.