The voices of Urban Institute's researchers and staff
October 20, 2017

Should the charitable deduction be expanded to all taxpayers?

October 20, 2017

With tax reform on the horizon, a major voice in the nonprofit world is advocating for the expansion of the charitable deduction to all taxpayers, not just to the minority who itemize. Independent Sector has launched the Giving100 campaign to support efforts to universalize the charitable deduction (the name also marks the deduction’s centenary).

In October, congressional representative Mark Walker introduced legislation that would allow taxpayers to take both the standard deduction and the charitable deduction.

Extending the charitable deduction to taxpayers who don’t itemize has long been a contested topic within the philanthropic sector. Looking back at the history of this debate highlights both the potential represented by proposals to expand the charitable deduction, as well as their limits, especially in relation to efforts to increase giving among all Americans.

What’s being said in support of expanding the charitable deduction?

Giving100 has marshalled two arguments on behalf of extending the charitable deduction to nonitemizers.

  1. Expansion would boost aggregate charitable dollars
  2. Expansion would broaden the base of donors and empower more people to give

Supporting the first argument, research commissioned by Independent Sector says several tax reform proposals championed by Republicans would suppress incentives for charitable giving and reduce giving by as much as $13 billion a year.

These tax reform proposals, such as roughly doubling the standard deduction and lowering the top marginal rate, appear in the recently released tax reform framework. Giving100 presents universalizing the charitable deduction as a way to compensate for potential losses and increase annual giving.

The second argument focuses on distributional equity. Tax Policy Center research shows that Republican tax reform proposals would result in only 5 percent of taxpayers itemizing, leaving the charitable deduction vulnerable to populist critique. Offering the deduction to all taxpayers would deflect this criticism. The campaign asks, why should government subsidize only the giving of itemizers, who tend to be high-income citizens? Isn’t giving good for all of us?

By answering in the affirmative, Giving100 promotes expanding the base of donors, not merely the supply of dollars. This argument presents charitable giving as a participatory ethic that society has an interest in guaranteeing to all citizens. This case is urgent today, given that fewer Americans are giving to charity and nonprofits increasingly rely on large donations for a greater proportion of their funding.

The history of the charitable deduction can guide today’s debate

When the charitable deduction was modestly expanded to nonitemizers in 1982, no clear evidence emerged that it significantly “stimulat[ed] charitable giving.” Citing high costs, administrative difficulties, and minimal impact, the Reagan administration allowed the temporary provision to expire in 1987. We should not read too much into this outcome. The Tax Policy Center recently noted that the nonitemizer deduction likely wasn’t big enough or in place long enough to increase giving.

Similarly, how much it expanded the base of giving is unclear. During the five years the nonitemizer charitable deduction was in place, the number of tax returns that included the deduction increased by around 10 million. But policymakers did not determine that this represented giving by middle- and low-income people that would not have occurred otherwise.

We still don’t know what the “signaling effect” on giving culture might be for a universal charitable deduction. Even so, given the enormous costs to the Treasury associated with the move, expanding the charitable deduction is not necessarily a cost-effective instrument to promote the democratization of giving.

That’s because a deduction pegged to a graduated income tax will provide greater subsidies to high-income people, who bear higher marginal tax rates they can offset. A Tax Foundation report mapped out the effects of establishing a nonitemizer deduction within the context of the House GOP Blueprint showed that the top 20 percent of taxpayers would see the largest percentage change in after-tax income from the shift to the nonitemizer deduction.

Given the “upside-down subsidy” the deduction offers within a progressive income tax, the philanthropic sector has long debated how the deduction could help democratize giving. It was a major source of contention within the Commission on Private Philanthropy and Public Needs, better known as the Filer Commission, which formed in 1973.

The charitable deduction was considered a partial, imperfect step to democratizing philanthropy

The Filer Commission emerged from anxieties surrounding congressional investigations of philanthropy that produced the Tax Reform Act of 1969, and the subsequent realization that the nonprofit sector lacked the research base and cohesive identity to address future reform. It was one of the most comprehensive efforts to mobilize scholarly attention to the field.

The Filer Commission was fueled by the charge to democratize philanthropy, or “broadening the base of philanthropy.” It recommended extending the charitable deduction to nonitemizers. But the commission also believed that “an additional inducement to charitable giving should be provided to low- and middle-income taxpayers.” So the commission proposed a “double deduction” for families with incomes less than $15,000. These families could deduct twice what they gave to charity.

Even this did not go far enough for some on the commission. These members proposed a tax credit as a more equitable instrument to broaden philanthropy’s base. Their ranks included John D. Rockefeller III, who backed a flat charitable tax credit of $50 offered to every citizen.

The Donee Group, representatives from social justice groups who sought to push the Filer Commission in a more progressive direction, also issued recommendations. They supported the universalization of the charitable deduction, but they argued it didn’t go far enough to democratize giving.

Because the expanded deduction offered greater tax benefits to high-income people, it “reverse[d] the progressivity of the income tax.” So the Donee Group recommended that on top of the charitable deduction, “a 100 percent tax credit for a modest but not insubstantial amount” (the group suggested $100) should be offered to low-income adults. They also suggested that, as an alternative to taking the charitable deduction and as a means of reducing inequities, a tax credit equal to 30 percent of the amount contributed should be available to itemizers and nonitemizers alike.    

None of these recommendations gained traction, and all would have been challenging to implement. But beyond the policy models they offer, the Filer Commission deliberations are worth reflecting upon as a reminder of the limits of the charitable deduction as an instrument to democratize philanthropy. For the commission, extending the deduction to nonitemizers represented a modest, uncertain first step toward that aim, one that required additional, targeted policy proposals to truly broaden the base of giving.

If we are to make good on the belief that “giving is good for all of us,” we need to approach the possibility of expanding the charitable deduction in similarly tempered terms.


Illustration by Alberto Ruggieri/Getty Images.


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