The Surprising Relationship Between Taxes and Charitable Giving

When it comes to charitable giving, it’s well known that taxes matter. The promise of a big deduction is a great way to get people to open their checkbooks.

Yet the relationship between taxes and giving isn’t as simple as it looks.

Researchers have been studying the issue for years, some by sifting through masses of tax-return data, others by handing people money and seeing how their donation decisions change when they are “taxed” in various ways. The results show that the money and taxes relationship is a lot more nuanced than the idea that a bigger deduction means a bigger donation—with significant implications for both charities and policy makers.

For instance, research suggests that the system of itemized deductions the U.S. has been using for decades is much less effective at spurring donations than tax systems in other countries that, for instance, offer charities matching donations. Still other research suggests people may even be willing to give money voluntarily to the government—if the government gives them the chance to direct the money to a cause they approve of.

Meanwhile, some scientists have found that the brain reacts the same way to making donations as it does to paying taxes, if the taxes are clearly being used for a good cause—suggesting that people may be more willing to pay taxes if they know how the money’s being used. And some findings even suggest that offering deductions for charitable giving may promote good health.

Here’s a look at some of the findings, and the lessons they hold for policy planners.

Watch what people do, not say
One of the basic findings of the recent tax research is that people don’t admit how important taxes are until push comes to shove.

Consider the findings from the U.S. Trust Study of High Net Worth Philanthropy, conducted by U.S. Trust and the Indiana University Lilly Family School of Philanthropy every two years since 2005. According to the survey, people’s main motivations for giving were to make a difference (73.5%) and for personal satisfaction (73.1%). Receiving a tax benefit came way down in 11th place in the list of possible reasons, cited by just 34.4% of respondents. And most people insisted that they’d still give the same amount even if they received no income-tax deduction for charitable giving.

But their answers changed when there was a real possibility of that tax deduction being reduced, indicating that people were happy to say that the tax deduction wasn’t all that important, until they came face to face with the likelihood that it might go away. In 2009, when the future of the charitable deduction was being debated, 67% of people said they would decrease charitable giving if the deduction were eliminated, up from 46.6% in 2005. In 2013, when the debate about capping the deduction had died down, the results returned more or less to the 2005 levels.

What’s more, as expected, when tax rates are higher, people are generally willing to give more. Jon Bakija of Williams College in Williamstown, Mass., examined income-tax-return data to track donations over almost four decades. Back in the 1970s, when the top rate of federal income tax was 70%, wealthier Americans (people with incomes of over $500,000 in 2007 dollars) gave around twice as much of their money to charity than they did in 2007, when the top rate had fallen to 35%. People in other income brackets, on the other hand, saw smaller changes in their tax rates, and made smaller changes to their charitable giving.

Author: Andrew Blackman
Published in: Wall Street Journal
Published Date: Dec 12th 2015
Read the Full Article