December 29th, 2017

Faith, hope, the tax bill, and charity

There have been a great many claims that the new tax bill passed by the GOP will have a chilling effect on charitable giving because it reduces the incentive represented by a tax deduction by increasing the standard deduction. In other words, fewer people will feel the need to itemize their deductions (particularly on the lower end of tax filers), and it’s only by itemizing that people get to count charitable deductions into the deduction mix.

You can find all sorts of estimates of the amount that charitable giving will supposedly be reduced as a result, but I have yet to see an article that explains exactly and in detail how those estimates are arrived at. In addition, quite a few of the slightly more detailed articles I’ve read were written after only the House version had been passed and therefore don’t reflect anything about the updated unified version that became law.

I’ve also read comments around the blogosphere and at news sites where many commenters give the impression that they think the GOP meanies have eliminated the tax deduction for charitable contributions, which is certainly not the case. To be fair, most of the articles try to make it clear that this is not the case, but apparently some people who read only the headlines have gotten the wrong impression, or just don’t understand the way tax deductions work (and on that last point I can sympathize).

But the bigger bucks donors will still have plenty of incentive to give to charity, since they will still be itemizing their deductions because they will have total deductions higher than the new standard deductions. And many small givers (like me, for example) rarely or never itemized because it wasn’t worth it to them, and yet many of them (like me, for example) nevertheless regularly gave money to charity. The fact that I couldn’t deduct that money didn’t mean that I didn’t give it. Nor did it mean I gave less.

I don’t think it’s possible to estimate how many people operate like I did, because their charitable contributions don’t appear on their tax returns.

The new standard deduction potentially handicaps only those charity-givers in the middle range of giving—that is, people who gave to charity under the old rules because their itemized deductions would then become higher than the old standard deduction (in 2017, $6,350 for a single and $12,700 for a couple). We don’t know (at least, I’ve never seen an article specifying) what percentage of charity-givers that represents or how much they now give.

Just as importantly, we don’t know why that group gave to charity or how their giving habits would change if they began to take the higher standard deduction rather than itemizing as they used to. In other word, how much did the fact that they could itemize those contributions determine whether they gave to charity and/or how much they gave to charity? Remember also that the new standard deduction level does not change the itemization picture for those who weren’t itemizing their deductions in the first place—who tend to be on the lower income end of things. Nor will it affect the people who were already itemizing deductions and will continue to do so—who tend to be on the higher income end of things.

For this middle group who used to itemize but now probably will take the standard deduction, will they actually contribute less to charity? In other words, were they giving to charity before only in order to get that higher deduction? Remember, these are not the big charity-givers—we’re not talking people who give $100,000 to charity a year. We’re talking about charitable contributions that are maybe in the few thousands range.

If you want to understand how a contribution of that sort used to affect a person’s taxes under the old rules, see this for example. It goes through the figures for a hypothetical single individual with an income of $50K who gave $9K to charity (that, by the way, is a MUCH higher percentage of income than most people give; it is not typical at all). The savings on that person’s taxes under the old rules would be $800, which is definitely something. But of course that would be offset by the $9K of the gift. In other words, the person gives a gift of $9K and yet it only costs the person $8.2K to do so. The tax deduction is nice, but the person’s income goes down $8.2K by giving that gift. Looking at that, one can only conclude that the person must be giving to charity because that person wants to give to charity, not because of the relatively small tax deduction the person ends up getting. Is the person giving more because of that $800 deduction than then he/she otherwise would? Perhaps, but there’s more to the picture. That “more” includes whether the person’s general tax burden is going up or down, and whether the person’s income and/or wealth is going up because of the improved economy.

Let’s say that same person gets a higher standard deduction under the new bill and perhaps even sees his/her taxes go down in other ways. I can easily see the same person giving exactly the same amount as before to charity (maybe even more) because he or she has more money now to begin with. I can also see people in the lower income levels, who perhaps didn’t give to charity before, starting to do so because they have more income to keep in the first place.

Not only might people tend to give to charity as the economy improves in general, but a big reason people do give is that they’re religious. They’re not going to lose that particular motive for charitable giving because of the new law, either.

For some unknown reason, donations from the middle class have decreased in recent years, even before this tax bill:

Data unveiled not long ago by Indiana University’s Lilly Family School of Philanthropy on its website, Generosity for Life, shows that volunteering and charitable giving overall has fallen 11 percent since the early 2000s. Another study, released last year by the Institute for Policy Studies, found that “while itemized charitable deductions from donors making $100,000 or more increased by 40 percent, itemized charitable deductions from donors making less than $100,000 declined by 34 percent… According to one estimate, low-dollar and midrange donors to national public charities have declined by as much as 25 percent over the 10 years from 2005 to 2015. These are the people who have traditionally made up the vast majority of donor files and lists for most national nonprofits since their inception.”

There are a few possible reasons for this decline in giving. Secularization is one, but the bigger factor is probably that most U.S. households have experienced flat incomes for many years in an era of soaring inequality. Many people lost ground during the Great Recession and have not recovered. At the same time, housing and healthcare costs have soared. So it’s no surprise that ordinary folks don’t give as much as in the past; they can’t afford to.

It’s actually possible, IMHO, that these rates will increase rather than decrease if the economy keeps being strong and people have more money in their pockets. That’s true at many levels of income. I’m not saying this will happen. But I’m saying it’s highly possible.

24 Responses to “Faith, hope, the tax bill, and charity”

  1. M J R Says:

    neo-neocon writes, “I’ve also read comments around the blogosphere and at news sites where many commenters give the impression that they think the GOP meanies have eliminated the tax deduction for charitable contributions, which is certainly not the case.”

    I was looking in on Laura Ingraham’s “Ingraham Angle” tee vee show a few nights ago. One of her guests was a civil rights attorney [I did not catch his name]. He said that the eeeevil Republicans had eliminated the mortgage interest deduction, doing which would substantially harm the middle class. As a clincher of sorts, he repeated the same thing a couple of minutes later, again with nary a mention that said deduction was to be capped at 3/4 of a million dollars [it had been capped at a full million through 2017 (I believe; I do not dwell in such rarified financial atmosphere)].

    Wow. Capping at only 3/4 of a million dollars sure will screw Joe and Jane Six Pack. [ sarcasm, dripping ]

    This guy was either

    – intentionally and knowingly lying, or
    – was trustingly repeating the talking points supplied to him by those who supply him with talking points — i.e., well-established professional liars.

    (I’ll wager that most watchers of Laura Ingraham are pretty well-versed in the high points of the tax reform bill — of which the new mortgage interest deduction cap is definitely one. I was mildly annoyed that neither Ms. Ingraham nor her other guest didn’t call him on it, but only mildly annoyed, because this guy’s audience (i.e., Ingraham’s at the time) was going to be pretty sparse in LIVs* anyway.)

    (Esteemed Reader: please correct me if I’ve gotten anything wrong here vis-a-vis the tax reform bill.)

    * LIVs = Low Information Voters

  2. T Says:

    “The fact that I couldn’t deduct that money didn’t mean that I didn’t give it. Nor did it mean I gave less.” [Neo]

    This reveals a basic flaw in the logic of those who criticize the higher standard deduction. Even if a charitable donation is deductible, one must donate a full dollar to obtain a deduction of, at best, 39.6% (2017 Income Tax Rates). That is still a deficit of 60.4 cents for every dollar donated.

    Now clearly a taxable deduction can help grease the wheels and encourage donation, but as Neo notes, such an argument completely ignores the fundamental altruistic basis of charitable donations in the first place; an altrusitic motivation that can exist across all income levels.

    IOW, the mistaken fundamental Progressive logic is that those filthy rich greedy capitalists will seek a $0.40 benefit that costs them $0.60 out of pocket; that’s a lousy expense ratio and no way to either make or keep oneself “filthy rich”.

  3. Geoffrey Britain Says:

    Since capitalism itself is EVIL, for the Left the only concern is how and to what degree the issue can be used to further the narrative.

    To the degree that the objective truth of the issue impedes the narrative, it represents an obstacle.

  4. Philip Says:

    Neo, the timing of this thought is quite interesting for me, as I admit I’ve been sending in more donations than I usually do to various things. Part of this, though not all, is indeed motivated by tax considerations on my part. (Other reasons include the fact that my employer rolled out a campaign to promote charitable giving this year.)

    I just glanced at the CS Monitor writeup. Boy, it would be some work to try to figure out whether I should try to nudge my tax bracket by giving X amount more before year’s end. Too much effort for me! 🙂

    I’m very interested to see how the new legislation alters the circumstances of these deductions. I admit that there are certain small donations that I gave these past few weeks that I probably wouldn’t have if I couldn’t itemize them. On the other hand, I did have a good year on a personal fiscal level, so having that breathing room did indeed create certain conditions for adding in those other donations. As you say, given such conditions, it seems logical for the donations to stay regardless of the tax consequence. Thus, T’s subsequent point is well taken.

  5. J.J. Says:

    I am one of those middle income tax payers who, under the old tax law, have a marginal tax rate of 25%. I have always considered the charitable deductions as an incentive to give 25% more. The charities I donate to are ones that I admire for the work they do. So, I will continue to donate, but maybe 25% less than before. It will depend on how the new tax bill works for me. Under the House version I was going to owe about $2500 more each year. But under the newly passed combined bill, it appears that I will be paying about the same as I am right now. If so, I will continue to give about the same to charity.

    In some ways the new larger deduction and lowered rates simplifies things, (I will no longer have to itemize, for instance.) but for those who have structured their financial lives around various tax deductions (as so many in California and New York have) this is going to be a hard pill to swallow. I predict that there will be much gnashing of teeth and rending of garments next year leading up to the November elections. The Congress could provide relief to those tax payers by providing a formula for allowing a percentage of the SALT (State And Local Taxes) to be part of their deductions. I live in one of those blue states with high property and sales taxes (but no income tax). Being able to deduct those has eased some of the pain of paying them. Also, I thought it was an accepted idea that taxpayers shouldn’t have to pay taxes on money that has been paid out in tax to local and state governments. I think there will be some debate about that principle this year because so many tax payers in California and New York will be affected.

    I hope the Congress will not be averse to amending the law if it turns out that it’s causing major dislocations of tax fairness.

  6. vanderleun Says:

    ” Indiana University’s Lilly Family School of Philanthropy ”
    WELL, one is glad there was enough charitable giving for this utterly useless academic clod of crap.

    The short form of all this palaver is that Dems and Progs and Libtards don’t know sheet or know expremely little about the new tax bill (Nearly none will read the real bill and think about it.)and, on the rare occassion they do know something about it, they will lie about it.

    The safe bet is to see what this bad Americans say is going to happen and assume t he direct opposite.

  7. Oldflyer Says:

    Critics reveal their dark view of human nature.

    Sure, I take the deduction. I do it primarily because I don’t want the government to have any more of my money than necessary. But, I donate to charities that I respect, and because I want to support them. Of course I throw multiple pieces of mail in the trash on a daily basis, but that is another issue. I do believe that there is a burgeoning charity racket; and some of it will suffer if folks can’t deduct. That is a good thing.

    Will, I be less likely to donate if I can’t deduct? I really don’t know, but I don’t think so.

  8. R.C. Says:

    One needs to think like an behavioral economist about this.

    Alterations to obscure (from Joe Everyman’s point-of-view) tax benefits don’t suddenly cause everyone to change his/her behavior. No, systemic changes to incentives only change decisions at the margins.

    If you’re the type of person who was hesitating between giving and not-giving, and the tax incentives change a bit, then, yes, your behavior might change.

    If you’re the type of person who was entirely committed for reasons unrelated to tax incentives, your behavior obviously will remain the same.

    So only the marginal givers population is likely to be affected.

    Speaking for the serious Christians of the world, most of the charitable giving we do is tithing and the remainder is additional gifts above-and-beyond tithing, proportionate to one’s financial blessings.

    The tithing focuses mostly on funding the ministries of your parish/”local church” and the broader communion/domination. The serious faithful typically calculate it as 10% of their pre-tax income. It’s pre-tax for two reasons: (1.) God gets first dibs, not government; (2.) If one’s giving is based on whatever’s left over after government takes its cut, then any move that increases taxation simultaneously starves out churches, which is unhealthy for society.

    So that part of the charitable giving simply isn’t going to be impacted. The whole psychology of it is, if anything, insistent that government policy motivates neither the decision to give nor the amounts.

    Who, then, will change their behavior? And how many such people are there?

    Well, it would have to be persons who…
    (a.) care enough about the economics of giving to know how the tax deduction incentives are changing; and,
    (b.) don’t care enough about the economics of giving to be deterred by the fact that you have to give $1.00 in order to get a $0.25 deduction if you’re in the 25% bracket, so it’s an economic loser no matter what you do, if economics is what you care about.

    They would also be people who…
    (c.) care enough about their giving to think carefully about how tax policy affects their gifts; and yet,
    (d.) don’t care enough about what they’re giving to, to keep on giving in spite of a marginal change to the tax advantages.

    In short, the kind of people whose behavior will be impacted by this are people with contradictory motivations and interests.

    Considering how quirky and unpredictable and irrational humans tend to be, I expect there really will be some folks who’ll behave in such a contradictory fashion.

    But only, I think, a few.

  9. M J R Says:

    J.J., 6:56 pm — “[F]or those who have structured their financial lives around various tax deductions (as so many in California and New York have) this is going to be a hard pill to swallow.”

    For me at least, I anticipate happily availing myself of the new, higher standard deduction.

    But on my California income taxes, where the California standard deduction is much lower than even the present federal standard deduction, it will still be to my advantage to itemize at the state level.

    And guess what appears as the first step for those who take the federal standard deduction but who choose to itemize on their California income tax return? — you guessed it (maybe): first fill out the federal IRS 1040 Schedule A (itemized deductions!), and then take it from there, attaching your copy of IRS 1040 Schedule A to your California tax return.

    Oh well. I’ll still anticipate happily availing myself of the new, higher federal standard deduction on my 1040.

  10. Gary D. G. Says:

    I wonder how this affects people who tithe

  11. charles Says:

    I’m old enough to remember when Reagan also did something with taxes and the same criticism was leveled against him.

    I decided then, as I believe now, those making this claim that “charitable donations will go down” reveal more about themselves than any basis in reality of what other people do.

    Some on the left see charitable donations as “just a tax deduction” and don’t give a squat about helping others. (unless it is helping others with YOUR money)

  12. J.J. Says:

    Oldflyer: “Of course I throw multiple pieces of mail in the trash on a daily basis, but that is another issue. I do believe that there is a burgeoning charity racket; and some of it will suffer if folks can’t deduct. That is a good thing.”

    You and I must be on the same suc…uh, er mailing list. The number of begging letters has increased exponentially in the last couple of years. Turns me off. As do the slick, professional TV ads for charities. They turn me off, as well.

  13. Bill Zerbe Says:

    I have never bothered with deducting charitable contributions. I don’t make a lot, and I give impulsively. Rarely is there even a chance for a receipt. Mainly people I encounter as I make my way thru my world, including money to bums. My favorite charity: the Salvation Army.

  14. Steve57 Says:

    Neo, here’s my New Year’s wish. That you don’t stop blogging. You have opened my eyes to entire different worlds.

  15. Tuvea Says:

    What R.C. and Bill Zerbe said.

    We give money to our mission oriented church because they spend it wisely helping those in need. We give money to the Salvation Army and various local food banks because we feel blessed with all of our resources and sharing some with those truly in need makes us feel good.

    No mortgage so we don’t bother itemizing. The new tax laws will save us money. But will have zero effect on our giving.

  16. Frog Says:

    The question of charitable deductions is linked to the tax-exemption of non-profits.
    My (public) university town is pretty fully developed, and each year there are more non-profits. The non-profit hospitals (religious and not) are land-owning monsters run by real estate developers who increasingly buy up the private sector in their hunger for market share. They now employ a majority of the docs in my town.

    This means the property tax of homeowners and for-profits must go up each year, even as assessments stay fixed, as our % of total ownership in the city goes down. The government monster must be fed. We are going back to Biblical times as far as tax collecting is concerned.

    As to contributions, I make them because I want to make them. Deductibility does not enter my mind, for reasons well-explained here above.

    The estate (death) tax exemption has been raised. But consider this: If susceptible to estate tax, your money can go either to Federal and state tax authorities, or it can go to non-profits, in order to get below the threshold for rapacious taxation. The only place that money may not go untaxed is to your children and grandchildren. That is the evil power of the State in action.

  17. Liz Says:

    Don’t forget that you can get a deduction for items, not just cash. And lots of the stuff that is donated is generally valued higher than what you can get on the open market. I use a tax program that gives suggested values for items and it is always higher than what I would have priced them at a tag sale.

    Another point is that there is a wide variety of charities – religious, relief services, social care, educational and artistic. I suspect that donations to churches and relief services will continue. However, some people may think twice about contributions for colleges and the arts.

    Those people who give large contributions to the arts and schools probably will continue to do so and they probably have enough other expenses to put on the schedule. Companies will just move the expense from “contributions” to “marketing expenses”.

  18. Oldflyer Says:

    Good points Frog.

    Happy to see that others agree about the Salvation Army. They are also my go-to charity even though I don’t think I know a single member. Saw a blurb recently about someone actually attacking a kettle tender/bell ringer (don’t think they have bells anymore). Hard to believe. Over and above more substantial donations, I cannot pass one by, because if they are willing to stand out there, I want to help make it worth their while.

    A personal plug. Two others I favor are the USO and Navy-Marine Corps Relief. Then there is also a small group in Montana called “Warriors and Quiet Waters” that takes wounded veterans, and families, on fly fishing getaways. Therapeutic. Oh, and “Cats in Need” an adoption service that helped us find our latest, older, Siamese; who has brought sunshine into our home.

    As a cancer survivor, and grandmother of another, my wife feels strongly about such organizations as “City of Hope”. That won’t change–I doubt that she even thinks about tax deductions.

    I am fairly confident that I will not change my attitude about my choices.

  19. David Foster Says:

    Oldflyer…”a burgeoning charity racket”

    Indeed, in too many cases ‘nonprofit’ means only that there are no pesky shareholders with whom the loot must be shared.

    In what sense is an ‘elite’ university really a nonprofit organization? The president and senior administrators are very well-compensated. Many if not most of the students are attending for the primary reason that they think it will benefit their future careers and pay off financially. Is there anything really ‘charitable’ about all this?

  20. Richard Aubrey Says:

    I like Fisher House.

    That said, the same kinds of arguments were presented when estate tax exclusions were raised. Fewer charitable bequests, was the argument. I have not seen any data since then either way.
    I should say that estate tax planning is a lucrative field and the larger the exclusion, the fewer people who need it, and the less financial instruments–like life insurance–they need to purchase. Maybe that was the motivation behind the bequest argument.
    My wife and I help an individual who is not a 501c3 and so we don’t get to deduct the help. This is a fair proportion of our charitable donations. So, to the extent we don’t report this, we look this amount cheap. Point is, how much of many people’s charitable activity including financial, is not deductible and hence not visible to the State?
    Last, as people have said talking about the Trump base out in flyover country. There are lots of people scratching to get by, buying the day-old breads at WalMart and such like who see food stamps being used by people who–stereotypically in a small town–are known to be able to work but do not. As eligibility for benefits expands, such encounters likely become more common. Might take some of the starch out of the charitable impulse.
    The Catholics have a doctrine of subsidiarity, which is to say the giver and the receiver should be close. I’m not sure of the spiritual side of this, but among other things, the giver is in a position to know what’s actually going on. And in some cases, perhaps financial help is not deductible.

  21. Ymar Sakar Says:

    The president and senior administrators are very well-compensated.

    They have to be. If a business makes a profit and doesn’t spend it on expenses like staffing… that would no longer apply as a non profit…

    It’s the logic of humanity, that they are ruled by lawyers when they think they rule themselves.

  22. AesopFan Says:

    Oldflyer Says:
    December 30th, 2017 at 12:47 pm
    Good points Frog.

    Happy to see that others agree about the Salvation Army. They are also my go-to charity even though I don’t think I know a single member. Saw a blurb recently about someone actually attacking a kettle tender/bell ringer (don’t think they have bells anymore).
    * *
    Our kettle tenders still ring bells.

    SA gives the largest proportion of donations to recipients IIRC from some previous study; Red Cross and Goodwill are actually very low.
    RC has never been one of my go-to charities, and is now totally off the list:
    http://www.breitbart.com/london/2017/12/04/belgian-red-cross-demands-branches-remove-crucifixes/
    * * *
    Tax considerations won’t change our giving totals, which are primarily tithing (on gross income, as someone mentioned above) for church operations including quite a bit of humanitarian charity work, and local needs.
    However, it was nice not to give the government leeches a share of the money we passed on to the church and other charities.

  23. T Says:

    “If a business makes a profit and doesn’t spend it on expenses like staffing… that would no longer apply as a non profit…” [Ymarsaker @ 12/30/17 6:48 pm]

    Y,

    This is an incorrect statement.

    David Foster, above, is correct. The only difference between a for-profit corporation and a non-profit is the presence or absence of shareholders. Profit is always made by these organizations and much of it is warehoused in the corporate treasury. Such corporations are NOT obliged to spend that profit as a pre-requisite for keeping their not-for -profit status. If that were the case, Harvard University and its ilk would have never have had the ability to build 35+ Billion dollar endowments from reinvested earnings (i.e., profit).

    The fact is that non-profits are generous with upper level salaries and executive perks because they do NOT have stockholders to answer to and essentially spend the $$ on themselves; they are not generous because the MUST be, and they are certainly not especially generous to lower level employees (just ask the secretaries and adjunct faculty at Harvard).

    That many of these organizations masquerade as “charities” and non-profitable institutions (non-profitable as opposed to not-for-profit, there is a difference) has been a fundamental pet-peeve of mine for the past 30 years.

  24. T Says:

    Update from taxprof blog posted 1/1/18 (H/T Instapundit):

    The headline:

    The IRS Scandal, Day 1698: Fallout From Tea Party Targeting Allegations Has Neutered IRS Oversight Of Nonprofits

    The quote:

    “. . . charities have now begun to recognize they face little or no chance of examination or sanction.”

    The link:

    http://taxprof.typepad.com/taxprof_blog/2018/01/the-irs-scandal-day-1699-fallout-from-tea-party-targeting-allegations-has-neutered-irs-oversight-of-.html

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