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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, December 19, 2012

Economic Growth, Not Tax Rates, Is Prime Driver of Charitable Giving

Wall Street Journal op-ed:  A Christmas Wish for Charities, by Kimberly O. Dennis (President & CEO, Searle Freedom Trust):

Nonprofits that oppose a limit on deductions but agree to higher tax rates make a devil's bargain.

Data from Giving USA, which tracks trends in American philanthropy, show that charitable donations as a percentage of disposable personal income has remained right around the 2% mark for decades.

It was 2% of disposable income in 1974, when the top marginal tax rate was 70%, and it was 2% in 1989, when the highest rate was 28%. Last year it was 1.9%. This suggests that the way to increase giving is to increase the amount of disposable income people have, and one way to do that would be to lower their taxes. To the extent that higher tax rates reduce disposable income, they will likely only depress giving.


Other Giving USA data going back to 1971 show giving to be remarkably constant as a share of gross domestic product. This figure, too, has remained relatively constant at around 2%, never going below 1.7% or above 2.3%. In 1971, giving was 2.1% of GDP; last year it was 2%. If the goal is to increase giving, the focus should be on raising GDP, not taxes. ...

If nonprofits knew what was good for them, they would be focusing less on preserving the charitable deduction and more on economic growth and wealth creation. As the dreaded fiscal cliff approaches, they should be lobbying for a tax system that lowers rates and eliminates loopholes, allowing capital—including charitable capital—to flow to its most productive use. The resulting prosperity would do much more for charities than preserving their own special carve-out from a punitive tax structure.

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Let's see how many things we can find wrong in this analysis.

1. The largest growth in recent times took place in the Clinton administration. Taxes on upper income groups were raised in the Clinton administration, not lowered.

2. Charitable giving is dominated by wealthy people. Income distribution in the last 20 years has been heavily skewed towards the wealthy. This, not growth per se was a major factor in the increase in charitable giving.

3. The higher the tax rates, the greater the benefit of deductible contributions. Basic economics works, the greater the benefit the more it happens.

4. Lowering tax rates did not create nearly as much growth as raising tax rates did in the 1990's. If you want growth, reducing the deficit by increasing taxes on the high income groups combined with government investment is the way to go. Investment drives growth, and low tax rates on the wealthy does not drive investment. (Aggregate demand does, in case anyone has forgotten Econ 101).

Okay, just a start.

Posted by: David R. | Dec 19, 2012 6:13:58 PM