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US Charitable Deductions Put To The Test

by Mike Godfrey, Tax-News.com, Washington

14 August 2013


Eliminating the deduction for charitable contributions, and trading the revenue gains for individual income tax rate cuts, would give a boost to the United States economy, according to a case study to explore the effects of repealing various individual tax expenditures within a possible tax reform structure issued by the Tax Foundation (TF).

The TF points out that "the income tax's charitable deduction serves the valuable purpose of encouraging private giving. Private charities are often more cost conscious, responsive, better targeted, and invite greater citizen participation than government outlay programs. The deduction also recognizes that people contributing to charities are transferring part of their incomes to others, which reduces their ability to pay taxes out of what remains."

Its findings conclude that, on a static basis, cancelling the charitable deduction would increase tax revenues by USD39bn, or by USD30bn on a dynamic basis, which considers tax-induced growth changes, as the TF also finds that the tax change would reduce US gross domestic product (GDP) by USD40bn.

It is explained that the growth slowdown occurs in the dynamic model because the loss of the deduction increases people's taxable incomes, pushing more of them into higher tax brackets. It is also considered that this may understate the harm because the model does not estimate the loss of charitable activities, some of which may be having a favorable impact on growth.

However, when the TF assumes that the static estimate of the revenue gain is directed back into an across-the-board cut in individual tax rates, it is estimated that the lower marginal rates would cause actually GDP to expand by some USD19bn, and, due to the positive feedback, provide a net tax revenue gain of USD5bn.

As the TF concludes, "the difficult policy question, of course, is weighing these benefits against the social desirability of the charitable deduction."

TAGS: tax | economics | business | fiscal policy | gross domestic product (GDP) | United States | tax breaks | charities | tax reform | individual income tax

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