Mixed Results from Elimination of Charitable Deduction

August 12, 2013

 

Mixed Results from Elimination of Charitable Deduction

Impact Moves Positive if Paired with Income Tax Cut

Washington, D.C., August 12, 2013—Eliminating the income tax deduction for charitable donations would slow economic growth and reduce employment by 131,100 jobs, according to a new study by the Tax Foundation. If the elimination were paired with an across the board income tax cut, however, that moderately negative economic outlook would turn slightly positive.

These results are part of the publication series The Economics of the Blank Slate, created to discuss the economic effects of repealing various credits and deductions, all of which are considered “on the table” as part of a comprehensive tax reform effort in Congress.

“In a conventional estimate, the Tax Foundation’s model predicts that repealing the charitable deduction would raise federal income tax receipts by $39 billion,” said Tax Foundation Senior Fellow Stephen J. Entin. “In the dynamic simulation that includes growth effects, we see that the loss of the deduction would actually shrink the economy by $40 billion, and that the revenue increase would fall to $30 billion.”

Losing the charitable deduction would cause a slowdown in U.S. economic growth because it would increase people’s taxable incomes, pushing more of them into higher tax brackets, reducing incentives to work, save, and invest. This estimate may actually understate the harm because the Tax Foundation’s simulation model does not estimate the social or other benefits in turn provided by the charities, hospitals, and educational institutions supported by donations.

If the revenue gain from eliminating the deduction were plowed back into an across-the-board cut in individual tax rates, however, the lower marginal rates would soften the tax system’s biases against investment and work, which would expand the quantities of both labor and capital and lead to more production.

“Our model estimates that the combined effect of trading the charitable deduction for a uniform cut in marginal rates would add $19 billion to GDP and, due to the positive revenue feedback, provide a small net gain of $5 billion in federal revenue. The difficult policy question, of course, is weighing these benefits against the social desirability of the charitable deduction itself,” said Tax Foundation Fellow Michael Schuyler, Ph.D.

Tax Foundation Fiscal Fact No. 389, “Case Study #11: Deduction for Charitable Contributions” by Michael Schuyler, Ph.D. and Stephen J. Entin, is available online. This study is the final report in a series of 11 case studies in the Tax Foundation’s Economics of the Blank Slate series.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

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