Brian Flahaven (@FlahavenCASE) is senior director of advocacy at CASE.
On Wednesday, April 26, U.S. President Donald Trump released a tax reform plan that would significantly cut individual and corporate tax rates. During a press briefing, Treasury Secretary Steven Mnuchin and Gary Cohn, director of the National Economic Council, stated that the administration’s tax plan protects the charitable deduction. But would charitable giving be left unharmed under the plan?
While details—including how or if the cost of the tax rate cuts will be paid for with revenue-raising proposals—are still to be determined, here’s an initial take on how the president’s plan would affect giving to educational institutions in the U.S.
Lower Tax Rates
President Trump’s tax plan would cut the top individual tax rate from 39.6 to 35 percent. Since a taxpayer’s charitable deduction rate is tied to his or her individual tax rate, such a rate cut would reduce the value of the charitable deduction. Instead of saving roughly 40 cents on the dollar by giving to charity, a high-income donor would only save 35 cents.
The bottom line: a cut in tax rates would increase the cost of giving for high-income taxpayers and likely reduce giving to charitable organizations, including educational institutions.
Higher Standard Deduction Threshold
In addition to lower rates, the president’s tax plan doubles the threshold of the standard deduction from $6,300 to $12,000 for individuals ($12,000 to $24,000 for married couples). With a significantly higher standard deduction threshold, many taxpayers who itemize their tax returns today would not do so if the president’s plan is enacted.
The House Republican tax reform blueprint (a plan that also significantly increases the standard deduction threshold) projects that the percentage of taxpayers who itemize their tax returns would drop from 33 percent currently to 5 percent under their plan. Since the charitable deduction is only a benefit for itemizers, 95 percent of American taxpayers would not have a charitable giving incentive under the president’s plan.
How would lower rates and an increased standard deduction impact overall giving? In a study of former House Ways and Means Committee Chairman Dave Camp’s 2014 tax reform plan, the nonpartisan Tax Policy Center found that the lower tax rates and increased standard deduction in the plan accounted for nearly half of the projected $17 to $34 billion decline in charitable giving. Middle to high-income taxpayers in particular would see the cost of giving rise if the plan was enacted, potentially leading to smaller charitable gifts and fewer donors to colleges, universities and independent schools.
And while the administration says it will protect the charitable deduction, a final tax bill could also include caps or floors on the deduction that would lead to an additional decline in giving.
Alternative Solution: Universal Charitable Deduction
President Trump could address his plan’s impact on giving by supporting a universal charitable deduction. A universal charitable deduction would provide a charitable giving incentive to all taxpayers, regardless of income, by allowing taxpayers to subtract charitable gifts before they determine their adjusted gross income. Such a proposal would both preserve and expand the current charitable giving incentive in the tax code while recognizing that, unlike other itemized deductions, the charitable deduction encourages people to voluntarily give away their money for the benefit of others.
As tax reform heats up on Capitol Hill, CASE will continue to urge lawmakers to preserve and protect the full scope and value of the charitable deduction. For more frequent updates, join the CASE Advocacy Network, a new online community dedicated to keeping CASE members updated on the latest legislative developments affecting advancement around the globe.
So the Republicans are keeping the Democrats’ top rate of personal income tax and drastically curtailing the state income tax and mortgage interest deductions! Republicans rightly call the Estate Tax the ‘Death Tax’, but they used to call the 39.6% individual income tax rate the ‘Hate Rate’. Now they are effectively raising individuals’ income tax rates.
Isn’t it just as likely that with more money in their pockets that donors could increase their giving? You make the assumption that the sole motivation for a donor is the tax deduction. Speaking strictly for myself, that is not my sole motivation; I suspect I might not be THAT unusual.
Thanks for your comment Steve. If tax reform is enacted, there would likely be donors who take the increased income from tax cuts and give more to charity. And most donors do give because they want to make a difference and/or are passionate about a particular cause or program. But tax policy and the value of the charitable deduction certainly plays a role in determining the form, size and timing of a gift. That is really how giving would be impacted – not in a donor’s decision to give, but in how and how much to give. Studies like the one I referenced in the post above show that when the cost of giving goes up, charitable giving goes down. And there is a high likelihood that the cost of giving will go up for most donors under the tax reform plans being considered.