If the charitable deduction were capped at 28 percent for the nation's highest earners, individual giving to charities would drop by $9.4 billion in the first year, a report from the American Enterprise Institute suggests.
The report, The Great Recession, Tax Policy, and the Future of Charity in America (23 pages, PDF), analyzed the effects and likely effects of the personal income tax rate increases passed at the beginning of the year and limits to the charitable tax deduction proposed by the Obama administration and found that while the tax increases are expected to increase charitable giving by 1.13 percent, a cap on the charitable deduction would likely reduce giving by 4.35 percent. According to AEI estimates, a 28 percent cap on charitable deductions would result in a 24.05 percent reduction in giving by the top 1 percent of high-income households and a 9.3 percent reduction by taxpayers who itemize their deductions. Only 0.51 percent of U.S. households bring in enough income to be affected by the proposed change.
The report also estimates that giving to religious organizations would fall roughly 1 percent as a result of a cap on charitable deductions — in part because the cap would affect only the highest earners, while lower-income households and non-itemizers are overrepresented among religious givers. In contrast, AEI estimates that giving to secular causes and organizations would drop roughly 7 percent.
"Wall Street may be doing fine, but America's nonprofits are still hurting. The recession and weak recovery pushed down incomes; at the same time, the volatile policy environment has kicked up uncertainty about where tax law is going," said AEI president Arthur C. Brooks in a video accompanying the study's release. "It's true that America badly needs a flatter, fairer tax code. If tax reform sparks stronger economic growth, the nonprofit sector would benefit along with everyone else. But there’s still no doubt that the deduction cap would have a dramatic effect on giving."