As the debate around renewing provisions of the Tax Cuts and Jobs Act (TCJA) heats up, a new working paper claims those tax cuts reduced charitable giving. A deeper dive reveals those claims are misleading as the analysis falls short in scope and methodology, while discounting the significance of higher income and growth on long-term patterns of charitable giving.
A notable underlying issue with this study is the analysis covers the years 2000-2018, including only one single year post-TCJA reform. This snapshot approach does not give us a comprehensive overview of long-term trends in charitable giving post tax reform. This is particularly problematic when we acknowledge that some donors likely bunched their donations in late 2017 in anticipation of tax changes, which creates an artificial increase in donations in 2017 and subsequent decrease in 2018.
The chart below reveals longer term giving patterns, beyond 2018. The data reveal individual and total charitable giving has continued to increase over time.
The second issue is the analysis focuses on a tiny subset of itemizing donors. The data is pulled from biennial interviews of about 4,000 individuals, while the data for itemizers likely to switch filing status is concentrated among less than 900 individuals. Such a narrow scope fails to properly account for broad changes in giving behavior among donors who do not itemize, or for the changes in giving among those who continued to itemize post reform.
For example, the average donation of donors who continued to itemize post reform increased from less than $7,000 to more $13,000 in 2018 and 2019, and more than $16,000 in 2020. At the same time, total nonitemized individual giving tripled between 2017 and 2018 from about $30 billion to over $95 billion, and reached almost $120 billion in 2019 and 2020.
What’s more, existing literature suggests survey data is less reliable and precise than tax filer data as it tends to overemphasize behavioral changes to tax policy.
A common issue with the scope of many studies that examine how tax policy impacts giving is they are overly reliant on federal tax return filings. Thirty-one states offer deductions for charitable contributions. By excluding these deductions, the analysis fails to account for how donors giving patterns change regardless of whether they file itemized returns at the federal level. Studies that do account for state deductions find purported declines in giving largely disappear when state deductible contributions are included in the analysis.
Finally, and perhaps most importantly, the working paper does not account for the positive impact of tax policy changes on income in its methodology. Changes in tax policy impact philanthropy in two ways: 1) by changing the tax price of giving and 2) through its impact on income and growth dynamics. Two years after the passing of TCJA, the Council of Economic Advisors estimated the tax cuts had raised inflation-adjusted household income by as much as $2,900.
As charitable giving typically amounts to about 2% of national income—a trend that has been consistent for several decades—any changes in economic activity are consequential for trends in charitable giving. To this end, prior research has found for every 10% increase in income, donors increases their charitable giving by 7%. This new working paper only accounts for changes in the tax price of giving without fully accounting for how higher disposable income and economic growth drive more charitable giving.
The assertion pushed by a new working paper that the TCJA negatively impacted charitable giving is misleading due to its limited scope and methodology. The study’s reliance on data from only one-year post-reform, its narrow focus on itemizing donors and its exclusion of state-level deductions all undermine its findings.
Moreover, by ignoring the positive income effects of tax cuts, the analysis fails to capture the full picture of charitable giving trends. A more comprehensive approach reveals nominal charitable giving has continued to rise while real giving has remained relatively constant, driven by increased disposable income and economic growth, underscoring the complexity of tax policy impacts on philanthropy.
