New Study Challenges Thinking Behind Charitable-Giving Tax Incentives

Studies have projected that President Obama’s proposal to limit the tax break wealthy people get for charitable deductions would dampen giving by various amounts. But would all charities feel the pain, or just those in certain fields?

Two professors at the University of California at Davis have just published a paper that explores that question. Using data from the IRS Statistics of Income, they developed an economic model to examine how state and federal income-tax rates affected giving to different types of charities from 1985 to 2005.

The result: Tax incentives had little or no effect on donations to charities in the fields of health, human services, or public and social benefit. But they did influence giving to organizations devoted to animals, arts and culture, education, and the environment, as well as to private foundations.

The authors — Michelle H. Yetman and Robert J. Yetman, both associate professors of management — say theirs is the first attempt to measure the impact of tax incentives on charitable contributions by using data provided by charities, rather than by taxpayers. While cautioning that the approach merits further research, they say the results raise an “intriguing” policy question.

If charitable deductions don’t influence how much people donate to soup kitchens or women’s shelters, should they be revoked for such groups since they cost the government money without expanding giving? “Likewise,” they write, “our results suggest that if the supply of charities such as private foundations and lyric operas is highly valued, one might plausibly suggest that the charitable deduction to these types of charities be expanded and enriched.”

President Obama proposed limiting tax breaks for itemized deductions, including donations to charity, to help pay for overhauling the health-care system.