Given a choice between donating a dollar to their favorite charity or keeping it to spend on themselves, Americans annually respond with $25 billion in charitable contributions.
The choice is easy for many donors, because a dollar donated to charity is not a dollar out of their own pocket.
Federal tax deductions for gifts to charity mean that a dollar donated to charity costs only 80 cents to a moderate-income taxpayer in the 20 per cent bracket, and as little as 30 cents to taxpayers in the top, 70 per cent bracket.
If it were a dollar for themselves or a dollar for charity - a one-for-one trade-off with no tax deduction - many contributers would keep the money, says Dr. martin Feldstein, a Harvard specialist in tax policy and chairman of the National Bureau of Economic Research.
Eliminating the deduction for charitable gifts, as many tax reformers have suggested, would cut gifts to charity by 26 per cent, Feldstein contends.
Feldstein's figures are one reason administration tax planners virtually have ruled out any direct change in the tax treatment of charities. "There are enough problems in tax reform without doing anything directly to charities," said one advocate of changes.
But other proposed tax law changes considered vital to the Carter administration's tax plan also would tend to discourage gifts to charity.
Raising the standard deduction, lowering the maximum tax rate, or eliminating the preferential tax treatement of capital gains all could lead to less generous giving.
Debate on the issue is just beginning, because the adminsitration has yet to submit its tax plans to Congress and because many charities do not yet understand how they might be affected by various proposals. When specifics of the tax change plan are known and impact on individual charities understood, a full-scale fight is anticipated. The debate could pit liberal educational institutions against their own tax change advocates. Big-gift benificiaries like colleges, hospitals and the arts could square off against little gift getters, like churches, because tax measures that encourage giving by some taxpayers may discourage donations by others.
The whole situtation is awkward for the charities, because they are reluctant to protest fundamental changes in the federal income tax system that happen to work against their own interest. "The charities can't very well argue for keeping tax rates high just to encourage donations," one tax specialist noted.
The charities, however, already have made their point on the issue of eliminating the deduction for gifts to charity. This step had been advocated by proponents of change as a way of simplifying tax returns and assuring that all incomes are taxed equally.
The charity deduction makes it possible for some high-income individuals to largely escape paying taxes by giving enough money to charities. Now individuals may deduct up to half their adjusted gross income in charitable contributions.
As one of many deductions available to taxpayers who itemize their returns, the charity deduction was the target of advocates of a simple, no-deductions tax return for all who pay.
That proposal fell victim to economist Feldstein's prediction that it would slash charitable gifts from $17.3 billion. Using mathematical models based on 1970 tax returns - the latest available -he calculated that charities would lose $4.5 billion in contributions and the federal government would collect $3.5 billion more in taxes.
Feldstein, whose research was financed by the Commission on Private Philanthropy and Public Needs, contends that the most important influence on charitable gifts is how much they cost after taxes.
The maximum tax rate paid by an individual becomes a discount on the price of gifts to charity. For example, a middle-income family, for whom the tax rate peaks at 22 per cent, in effect pays a price of 78 cents for a $1 donation to charity, while a taxpayer in the 52 per cent bracket can give $1 to charity for only 48 cents of his own money. Wiping out the income tax deduction would effectively raise the price of a $1 donation to $1 for all taxpayers. That would discourage giving by high-income taxpayers, but have less impact on lower-income families, economists say.
Feldstein figures taxpayers in the $10,000 to $15,000 bracket, who gave an average of $290 to charities in 1970, would cut their giving by 22 per cent to $225 without the deduction. Taxpayers in the $100,000 to $500,000 bracket would reduce their average annual donations from $9,184 to $2,246, giving 75 per cent less.
Because high - and low-income persons tend to give money to different charities, ending the deduction would shift gifts. The Feldstein study projects the loss of contributions would amount to 22 per cent of giving to churches, 27 per cent for health and welfare organizations, 46 per cent for hospitals and 48 per cent for schools and colleges.
Other proposals for tax changes also would affect some charities more than others.
Lowering the maximum tax rate, one of the major goals of administration advocates, will tend to discourage giving by high-income taxpayers by raising the cost of their gifts. If the top rate drops from the present 70 per cent to 50 per cent, the cost of a charity dollar to top-bracket taxpayers will nearly double, jumping from 30 to 50 cents.
The result, even Treasury officials concede, would be fewer big gifts to colleges, hospitals, museums, and the performing arts. But the impact would be minimal on the lower-bracket contributers to churhes and health and welfare agencies.
Another proposal considered by charities to be undesirable but unavoidable is an increase in the standard deduction. Since 1970, the standard deduction has been raised eight times and the number of taxpayers itemizing their 1040s has dropped from 48 per cent to 25 per cent.
Feldstein calculates that the shift away from itemized deductions already has discouraged $1.4 billion in charitable contributions by removing the tax incentive of standard-deduction users to make such gifts. he projects a 6 per cent decrease in total charitable giving if the standard deduction is raised again.
Changes in the tax treatment of long-term capital gains also are considered likely to be included in the administration tax plan. Taxing capital gains as ordinary income - instead of at half the rate - would not affect contributions greatly.
But the capital gains tax now allows property that has been held for capital gains to be given to charity and a deduction claimed for the full apprecated value of the property. This provision can make it more advantageous for high-bracket taxpayers to give away the property than to sell it for capital gains. Tax Analysts and Advocates, a Washington-based organization that seeks changes in tax laws offers this example:
A taxpayer in the 70 per cent bracket owns property with a present market value of $1,100, which was acquired for $100. If the property is sold for a capital gain of $1,000, the taxpayer realizes a net gain of $650 after paying the capital gains of $350 (Half the 70 per cent rate). If the property is donated to charity, however, the full $1,100 can be deducted as a charitable contribution, saving the donor $770 in taxes. That is $120 more than if the property were sold the organizations notes.
Utitlized by some of the wealthiest donors to charity, this loophole results in contributions of $1.65 for every $1 in taxes lost, Feldstein calculates.
Advocates of tax law changes say it is possible to rewrite the capital gains law in such a way as to continue to make large gifts of property attractive, protecting this important source of contributions to university endowments and foundations. But it is unlikely that some other special pleadings will get much attention from the tax writers.
The Commission on Private Philanthropy and Public Needs, headed by John H. Filer, chairman of Aetna Life and Casualty, has suggested two ways to protect charities.
Taxpayers who take the standard deduction also ought to be allowed to deduct charitable gifts, the Filer Commission suggested. And to spur giving by middle - and lower-income families, charitable contribution deductions of 200 per cent by persons making less than $15,000 per year and 150 per cent by those earning up to $30,000 were suggested.
Another suggestion is to convert the deduction for charity gifts into a tax credit, perhaps 25 to 30 per cent of the donation. That would make the cost of donations the same for high - and low-income taxpayers, and would tend to encourage donations by low-income persons, and discourage them from higher-income taxpayers. The net result might be more giving, Feldstein says, but the gifts would go to churches and would be shifted away from colleges and the arts to churches.
The constitutional issue raised by a direct tax credit for gifts to a religion argue against that approach.