We released a new study today examining the economic justification for the federal income tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. for charitable gifts.
From the perspective of economic efficiency, it turns out it’s hard to justify the current size and scope of the federal charitable deduction. Most 501(c)(3) public charities now benefiting from the deduction are neither charitable, in the sense of relying mostly on altruistic gifts, nor are providers of what economists call “public goods.”
Here are two charts that tell much of the story. First, the charitable deduction’s benefits are highly regressive:
Second, most 501(c)(3)s actually rely mostly on program revenues—e.g., tuition from college students or admission fees at art galleries—and government grants for funding, casting doubt on the notion that they wouldn’t be privately provided in the absence of a federal taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. subsidy for them:
The full paper is available here.
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