Faith, growth, and charity

Policy Review, Mar/Apr 1997 by Barry, John S

" Implementation of a federal flat tax with no charitable deduction will cost the nonprofit sector $20 billion a year in lost giving."

This statement, from a recent article in the Non-Profit Times, echoes the mantra of those who believe that Americans would simply stop giving money to charitable causes if they lost their federal tax break. Some policymakers have even asserted that we need not a flatter and simpler tax code with fewer deductions but yet another tax credit, this time for charitable contributions. Senator Dan Coats's proposal, for example, would provide each taxpayer with a dollar-for-dollar credit for charitable giving up to $500 per year ($1,000 for married couples). As the federal government rolls back 30 years of failed welfare programs, such credits are advocated as a way to help private nonprofit organizations "pick up the slack" in caring for the poor.

Yet critics of a flat tax without a charitable deduction and proponents of additional credits for charitable donations are making the same error of analysis: They assume that giving patterns are tied directly to government tax policy. This view overlooks historical and demographic trends that indicate tax incentives are far down the list of factors that determine how and why people give money.

The most overwhelming proof that tax incentives have a relatively minor effect on individual charity is the tremendous consistency over time of giving as a percentage of income. Although the tax code has changed frequently and dramatically over the past 23 years, giving as a share of personal income has hovered around 1.83 percent. This measure reached as high as 1.95 percent (in 1989) and as low as 1.71 percent (1985). The narrow range has persisted even though the top marginal tax rate has fluctuated in that period between 28 and 70 percent. It suggests that raising income growth will do more to boost charitable giving than any tax incentive.

Giving actually increased after Ronald Reagan effectively reduced the value of the deduction by lowering marginal tax rates in 1981 and 1986, and he eliminated the deductibility of charitable gifts for nonitemizers in 1986. Yet total giving increased (in inflation-adjusted dollars) every year between 1983 and 1989. This defied the predictions of those who believed tax incentives are the most important determinant of individual giving.

If tax incentives do not top the list of reasons why people give, then what does? The single most reliable indicator of an individual's level of charitable giving is church attendance. According to a 1994 poll conducted by the American Association of Fund-Raising Counsel's (AAFRC) Trust for Philanthropy, donors who attend church give an average of 2.2 percent of their income to charity; those who do not average only 1.4 percent. And the churchgoers' higher level of giving is not confined to their own congregations but extends to all types of nonprofits.

The survey also reported that donors who attend church services weekly give an average of 3.3 percent of their income to nonprofits, while those who attend monthly averaged 1.4 percent-the same as non-churchgoersand those who attend only once or twice a year average 1 percent.

The facts-overlooked by many policymakers-indicate that charitable giving depends upon much more than just the tax code. Active civic participation, and church attendance in particular, is more important to a healthy nonprofit sector than the presence of any tax credit or deduction. Thus a new tax credit will likely do little to increase charitable giving. On the other hand, as the federal government continues to reduce its role in America's welfare system, Americans will turn for support to civic organizations such as their churches. And this increased civic participation will do more than anything to increase giving to charities.

John S. Barry is an economics policy analyst with The Heritage Foundation.