Time to Reform the Charitable Contribution Deduction?

November 23, 2005

We released a new study today examining the economic justification for the federal income tax deduction 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 tax subsidy for them:

The full paper is available here.

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