November 23, 2005
Study Finds Charitable Tax Deduction Regressive, Unfairly Subsidizes Many Non-Charities
For immediate release.
Media contact: William Ahern (202) 464-5101.
With Congress considering bills that would expand federal tax incentives for charitable giving, a new Tax Foundation study finds the federal tax deduction for charitable gifts is highly regressive and subsidizes many organizations that are questionably charitable.
“More than 75 percent of tax benefits from the charitable deduction go to the 12 percent of taxpayers with incomes over $100,000,” said Staff Economist Andrew Chamberlain, co-author of the new study.
In addition to being regressive, the study finds that few charities now subsidized by the charitable deduction provide services that wouldn’t otherwise be supplied in the marketplace without a tax subsidy.
“The federal tax code subsidizes gifts to a wide range of groups, including hospitals, colleges, think tanks, cemetery companies, fraternities and sororities, veterans’ groups and more,” said Chamberlain. “Gifts to traditional charities like scientific research and civil rights groups are a small part of total giving.”
Nonprofit human services groups receive just 6.5 percent of charity revenue, while scientific research, civil rights, and environmental quality groups receive less than one percent each. In contrast, hospitals and universities, which are not primarily charitable organizations, receive nearly 57 percent of charity revenues.
“Many charities are similar to for-profit companies, selling private goods and services rather than conducting traditional charitable work,” said Chamberlain. “It’s hard to justify tax subsidies for them.”
For example nonprofits magazines like Ms., Nation’s Business, Harper’s, Mother Jones and others are indistinguishable from for-profit magazines. The National Geographic Society sells videos and maps in direct competition with for-profit stores. The YMCA operates health clubs that are identical to for-profit gyms.
The President’s Advisory Panel on Federal Tax Reform recently recommended expanding the charitable deduction in various ways. However, the study notes those benefits come at a real cost to society. By shrinking the federal tax base, the exemption for charitable gifts forces up tax rates for everyone.
“There’s no justification for subsidizing services that free markets will normally provide,” said Chamberlain. “As Congress considers tax reform in the coming months, Members should consider restricting the definition of charity to include only charitable organizations that provide clear public goods.”
The report is titled “Charities and Public Goods: The Case for Reforming the Federal Income Tax Deduction for Charitable Gifts,” Tax Foundation Special Report No. 137, by Andrew Chamberlain and Mark Sussman.
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
# # #
