Charitable contributions would drop by $33 billion if the charitable tax deduction were eliminated and top income tax rates set at 21%, according to research by Price Waterhouse for the Council on Foundations and INDEPENDENT SECTOR.^* If the estate and business tax deductions for charities were also eliminated, an additional $4 billion would be lost bringing the total loss to $37 billion or 31% of all charitable giving.

The year long study, which is the most comprehensive, authoritative information on the subject, shows clearly that tax reform proposals which would eliminate the charitable tax deduction would place an enormous new burden on charities at the very time that the federal government is continuing to cut sharply the funding of social programs and calling on charities to pick up the slack.

IS President Sara Meléndez said, "I hope this research lays to rest once and for all the disinformation coming from some groups asserting that the charitable deduction has little, if anything, to do with the amount people contribute to charity. Most people don’t give because they receive a tax deduction; they give because it’s the right thing to do. However, the amount they give clearly is greatly affected by the charitable deduction."

The study is based on the most recent and the most comprehensive data available to the public, information from the 93,000 federal tax returns filed in 1992. The analysis also examines peoples’ decisions to give as well as how much they give. In addition, it also includes information from giving by those who don’t itemize their income tax.

The research was conducted to analyze the impact of various tax reform proposals, considered by the last Congress, that many believe may form the basis for future Congressional action. Several of the tax reform proposals would cause a substantial reduction in giving, while one would greatly increase contributions. "IS does not take a position for or against tax restructuring proposals," Ms. Meléndez said, "but while we do not support or oppose tax restructuring, we will work aggressively against any move to eliminate the charitable tax deduction."

A number of tax reformers have claimed that flat tax proposals, which would eliminate the charitable tax deduction, will at the same time increase taxpayers’ disposable income, causing taxpayers to give more to charities. The Price Waterhouse research shows otherwise. The research clearly shows that the effect on giving of losing the charitable deduction is much greater than the modest increase in giving that would come from taxpayers’ enchanced income resulting from lower tax rates.

The study also shows that contrary to some reports, giving by individuals has decreased over the past 25 years as a percentage of personal income. Total giving has gone up over that same period, but had per capita giving remained the same, total giving would have increased even more.

The behavior of upper income taxpayers — those most affected by reduced tax incentives for giving, clearly reflects the role of tax incentives in stimulating contributions. Internal Revenue Service data show a substantial drop in giving by these taxpayers, measured as a percentage of their adjusted gross incomes, that corresponds with reductions in the top tax rates for those upper income taxpayers that occurred in 1981 and in 1986.

It is important to note that the effectiveness of tax incentives is not limited to upper income taxpayers. Itemizers who take a charitable deduction make larger charitable contributions than nonitemizers who can’t take a deduction. There is perhaps no clearer indication of the importance of the charitable tax deduction than the fact that those taxpayers who can take a deduction consistently give more than those who cannot, and this fact holds for all income groups.

As a nation, we are embarked on a bold initiative to scale back federal involvement in a broad range of public concerns that are also the focus of charitable activity. Nonprofit charitable organizations are on the front lines of this experiment and charities are being called on to expand their efforts, even as government funding for their activities is declining. In this context, preserving current levels of charitable giving is plainly not good enough — Americans must be encouraged to be even more generous in their charitable giving. The central conclusion of this report is that maintenance of robust tax incentives for charitable giving and continuing the historical principle of tax exemption for charities are essential to achieve this result.

Note: Limited copies of the full report are available from INDEPENDENT SECTOR upon request