UNITED WAY CEO DEBUNKED CHARITABLE DEDUCTION CLAIM

Those who believe that the Senate’s tax rate cut and $20,000 cap on itemized deductions will hurt charitable giving should read former United Way boss Elaine Chao’s article on giving and taxes. She found economic growth, not deductions, impacts donations.

“The entrance of self-financed candidate Steve Forbes into the 2000 presidential race is sure to revive the unfinished political debate over the merits of a flat tax, which Forbes made the centerpiece of his 1996 campaign. If so, he may have to answer one of the most persistent and wrong-headed criticisms of the flat tax—that it will cause charitable giving to decline.

Some in the nonprofit sector mistakenly believe this will occur because under a flat tax—where all income is taxed at one rate—the tax deduction allowed for such giving is eliminated. Yet government data contradicts this impression. If anything, a flat tax will likely boost charitable giving.

For one, the current deduction does not influence the amount people contribute nearly as much as flat-tax critics think. In fact, Americans have always helped their neighbors in need. As early as 1831, when Alexis de Tocqueville toured a young America, he marveled at the willingness and enthusiasm of this new country’s residents to band together in voluntary associations to solve common community problems. Long before there ever was an income tax, charitable giving blossomed in the United States. Even today, when more than 70 percent of taxpayers do not itemize their tax returns and therefore get no benefit from the deduction, donations remain strong.

Indeed, charitable contributions as a percentage of personal income have remained constant despite wide variations in the income tax. Although the top marginal income tax rate (and therefore the value of the deduction) has ranged between 28 percent to 91 percent during the post-World War II era, the amount that individuals donate to nonprofit groups has remained surprisingly constant, at around 1.8 percent of personal income (see chart).

There are several factors that significantly affect the amount an individual contributes to charitable organizations, but the charitable tax deduction isn’t among them. Surveys show that marital status, religious participation, age and who makes the “ask” are far more important. In the end, of course, people give because they believe in a particular cause or organization. Tax-code reforms—even ones that abolish the charitable-giving deduction—won’t depress the level of giving.

On the contrary, the growth in personal income, savings and net wealth unleashed by a flat tax will almost certainly generate higher levels of giving. That’s because the flat tax eliminates features of the tax code that hinder wealth creation and income growth, such as the estate and marriage-penalty taxes. And with a bigger pie, charitable organizations are sure to get a bigger slice.

Consider how the tax cuts of the 1980s affected charitable donations. In 1981, President Reagan’s first economic plan dramatically reduced marginal tax rates. The plan included an across-the-board reduction of 25 percent in marginal tax rates for individuals, as well as a reduction in the highest individual rate from 70 percent to 50 percent. Many economic analysts and nonprofit organizations predicted charitable contributions would fall as a result.

These fears were never realized. By 1986, total charitable giving was 16 percent higher (after inflation) than it had been in 1980. The economic growth that resulted from reducing marginal tax rates actually boosted the amount donated to charitable organizations. Between 1980 and 1986, the amounts contributed by donors in every category (individuals, corporations, foundations and bequests) increased, as did the levels of contributions received by nonprofits in every category (from the arts to social welfare organizations).

Virtually the same thing occurred in 1986. That year’s tax bill eliminated numerous deductions in the tax code and lowered the top individual marginal rate from 50 percent to 28 percent. Once again, many analysts erroneously predicted a dramatic reduction in charitable giving. Yet charitable contributions for 1987 totaled $90.3 billion, a 7.6 percent increase over 1986. In fact, total charitable donations increased (in inflation-adjusted terms) every year between 1983 and 1989.

The bottom line is clear: Increased personal income leads to increased contributions, as every fundraiser knows. Instead of fixating on the deduction, charities and other nonprofit groups should be supporting tax-reform policies that boost economic growth, such as the flat tax. Harvard economist Dale Jorgenson estimates that general economic activity would increase by about 10 percent under a flat tax, and other economists believe personal income will increase by as much as 15 percent.

Judging by the historical record, nonprofit groups have nothing to fear from losing the deduction. If their goal truly is to increase resources to help those in need, they should support the flat tax.”

Elaine L. Chao, former president and CEO of United Way of America and director of the Peace Corps, is a distinguished fellow at the Heritage Foundation.