How Reagan tax cut could turn charity on its head
President Reagan's tax package could have an odd effect on charity: It should made the wealthy less generous and middle-and lower-income groups more generous.
Such a shift has varying implications for different charitable organizations. The well-to-do tend to give their money to educational and artistic activities; the less affluent are more likely to donate to churches, hospitals, and such general charitable programs as the United Way.
Adding to the unease of many charities has been the Reagan administration's budget cuts. In a recent study, the Urban Institute found that more than $27 billion in government funds will be drained from the budgets of charitable organizations over the next four years.
Furthermore, reducing personal income taxes by 25 percent and capital gains taxes by 20 percent could, over the next three years, shave off $8.6 billion in private donations from people with incomes above $45,000. According to Lawrence Lindsey of the National Bureau of Economic Research (NBER), the tax package could cost charities $2.1 billion in 1982, $2.9 billion in 1983, and $3.6 billion in 1984.
"The most fascinating effect of changes in tax policy is not the aggregate reduction or increase in private charitable contributions per se,m but the shift in the distribution to donation recipients," observes Mr. Lindsey.
As tax rates fall, the cost of making a donation rises. Since inflation nudges taxpayers into higher income brackets, only those above the 50 percent tax bracket will benefit from the tax cut, according to Lindsey. NBER studies have found that the person with an income above this level on the average now pays 66 cents of every dollar in taxes, so the cost of giving $100 dollars to a charity is forgoing $34 dollars of income. After the personal income and capital gains tax cuts take effect, the average cost of giving will rise to $47 dollars. Therefore the personal tax cut will dampen the incentive to give for the wealthy.
Countering this "price effect" is an "income effect." Lower taxes mean more disposable income, some of which will go to charities.
Taking these two effects together, NBER projects a dramatic decline in individual philanthropy. Of course, if inflation shortens its stride to match the administration's projections, bracket creep will slow down below NBER's estimates and the price and income effects will extend to those below the 50 percent bracket. Given the dominance of the price effect, donations could shrivel by more than $8.6 billion over four years.
The situation is not entirely bleak, however. To compensate for its large budget cuts, the administration has inserted legislation into its tax package aimed at stimulating private philanthropy. One part of the package allows nonitemizers -- most of whom have incomes below $20,000 -- to deduct part of their donations on the short form. This could increase donations by $4 billion a year, or 12 percent, says John Thomas of Independent Sector, a national coalition of voluntary organizations, corporations, and foundations.
According to the most recent Internal Revenue Service data, 90 percent of nonitemizers have incomes below $20,000. The new legislation, therefore, should most greatly benefit those organizations which receive funding from lower- and middle-income groups.
"The stunning fact is that half of private charitable donations come from households with incomes below $20,000," remarked Thomas. "If you give these people additional incentive to donate, there's no telling what will happen."
What might happen is that the budgets of educational institutions and the arts dry up while those of churches, hospitals, and general charitable organizations expand.
After balancing the assets and liabilities. charities may come out more in the black than statistics indicate. When considering the human element, Conrad Teitell, a lawyer at thee Philanthropy Tax Institute, is optimistic.
"If you are looking for a tax shelter, you're better off investing in oil drilling or property," he observes. "I've never seen a donation made for tax reasons. People contribute to charities because they believe in what the organizations are doing for society."