America: Recent Tax Reforms Will Hurt Charities
Despite its orthodoxy in favor of the market, which has always been declared, the United States has always had an unusually large non-profit sector. Americans gave $ 390bn to charity in 2016, with most of the contributions coming from individual donors. Historically, income in non-profit organizations tends to track GDP growth. Recent tax reforms imply that despite strong economic growth, charitable contributions in the United States are about to fall for the first time since the financial crisis.
The most important threat to charities comes from changes in income tax. American taxpayers can choose between “detailing” specific expenses, such as charitable gifts or mortgage payments, or taking a “standard deduction.” In an effort to simplify the tax code and reduce overall tax rates, the Republican-led Congress nearly doubled the standard deduction to $ 12,000 for individuals and $ 24,000 for married couples. This will make filing taxes much easier for many. But it also means that many Americans will have a financial incentive to donate money.
The charities, understandably, are worried. The Tax Policy Center, a group of experts, estimates that the proportion of households claiming charitable deductions will decrease from 21% to 9%. The decrease will be especially pronounced for middle-income and upper-middle-income households (see box). It is expected that total charitable donations fall between 4% and 6.5%, or between 12,000 and 20,000 million dollars. Research from the Lilly Family School of Philanthropy at Indiana University has reached similar conclusions.
Some nonprofit organizations will be hurt more than others. Middle-class families, whose tax incentives have changed most, tend to give more to local churches and charities, such as soup kitchens, while the rich give more to universities. The differences in preferences can be severe. A 2005 survey found that donations to religious institutions represented two-thirds of the charitable contributions of households earning less than $ 100,000 per year, but only one-sixth of the contributions of households earning more than $ 1 million. Museum managers should be more concerned about changes in the stock market than any changes in the income tax.
Charities will also be affected by other changes in the tax code. The cuts to the higher marginal tax rate for both individuals and companies will further reduce the incentives to grant. In addition, fewer people will be affected by inheritance tax, inheritance tax or tax (although this provision, which raises the threshold above which the tax must be paid, expires in 2025). Assessing the impact of this change is difficult. An approximate analysis, also from the Tax Policy Center, concludes that a total revocation of the estate tax would reduce charitable donations by another $ 4 billion a year.
The charitable tax deduction has been controversial for a long time. After all, it is actually a subsidy that allows individuals to unilaterally direct public spending. The reforms could be seen as a partial victory for critics: tax deductions for charitable donations are expected to fall from around $ 63 billion to $ 42 billion. But tax subsidies for charity can also be seen in a positive light, as a decentralized way for those who have minority beliefs to direct government funds. Rob Reich, a political scientist at Stanford University, points out that one of the consequences of tax reforms is that government subsidies for charitable donations will be more biased towards the preferences of the rich.