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Last modified: Friday, November 19, 2010

SPEA policy brief: No ideal system of tax deductions for charitable giving

Nov. 19, 2010

BLOOMINGTON, Ind. -- Economists can measure and model the impact that tax deductions have on philanthropy, but the design of the tax code is a political decision that reflects competing ideas about fairness and efficiency, IU School of Public and Environmental scholars write in a recent policy brief.

Titled "Charitable Giving and the Personal Income Tax," the brief addresses a proposal by President Barack Obama to lower the rate at which high-income taxpayers can claim deductions for charitable donations. It is part of SPEA Insights, a series of articles written by Indiana University SPEA faculty members about their areas of research and expertise.

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Michael Rushton

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Michael Rushton, associate professor and director of the Master of Public Affairs and Arts Administration programs at SPEA, highlights the complexity behind what seems to be a straightforward change in how tax deductions are treated. "While economists have something to contribute to the debate," he writes, "they don't have all the answers."

Rushton notes that supporters say the Obama proposal would reduce the deficit and spread the cost of government more fairly among taxpayers of different income levels. But critics call it a "tax on charitable gifts" because wealthy donors will reduce their giving by the amount their taxes are increased.

In recent news reports and policy discussions, the proposal has been overtaken by a preliminary report from the leaders of the president's deficit reduction commission, which calls for lowering top marginal income tax rates and also reducing certain deductions, including the deduction for charitable giving.

Rushton writes that the issue raises three questions, none of which is likely to be resolved through consensus:

  • How much of an incentive should the tax code produce for charitable giving?
  • Is it fair to treat taxpayers differently based on the donations they choose to make?
  • To what extent should the tax code be progressive, with higher-income earners paying more?
Kirsten Grønbjerg

Kirsten Grønbjerg

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Rushton writes that there is "no ideal system" of income taxes and deductions. Rather the design of a system is "political in the best sense," to be worked out by citizens and their government representatives through a compromise of values.

"Policy analysis can contribute estimates of important magnitudes, and provide a framework for organizing thoughts on the subject, but beyond that, deliberations and democracy must prevail," he writes.

The SPEA Insights issue also includes comments by Kirsten Grønbjerg, professor of governance and management at SPEA and Efroymson Chair at the IU Center on Philanthropy; and Leslie Lenkowsky, clinical professor of public affairs and philanthropic studies at SPEA.

Grønbjerg writes that there is evidence that reducing tax deductions has an impact on when wealthy donors are likely to give, but there have been few studies that measure both the timing and the permanent effects of tax changes on giving. "Moreover, tax incentives are not the primary reasons why donors give," she writes.

Leslie Lenkowsky

Leslie Lenkowsky

She adds that the discussion also raises questions about the "hyper-agency of wealth" -- the ability of wealthy donors to have a disproportionate impact on the causes and organizations they support -- and whether the tax code should favor that ability.

Lenkowsky writes that public policy affects charitable giving not only through changes in the tax code but also through policies that influence the amount of donors' disposable income. While economists may debate the impact of the Obama administration's proposed tax-deduction revisions, Lenkowsky writes, "the success of its economic policies in stimulating growth income and wealth will have a far more profound defect on charitable giving."

The complete policy brief is available online at Previous issues of SPEA Insights are at