How do charitable donation deductions work? Do tax write-offs encourage people to give?

Companies sometimes match donations to charity. What if the government did too?

How do charitable donation deductions work? Do tax write-offs encourage people to give?0

Then-UK Prime Minister Tony Blair and comedian Dawn French with a £4.3 million Gift Aid subsidy check marking the conclusion of a charitable fundraiser in 2001. Michael Stephens/PA Images via Getty Images Dylan Matthews is a senior correspondent and head writer for Vox’s Future Perfect section and has worked at Vox since 2014. He is particularly interested in global health and pandemic prevention, anti-poverty efforts, economic policy and theory, and conflicts about the right way to do philanthropy.

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Imagine a charity comes to you with an offer. If you give them a donation now, they’ll get it at least partially matched — so for every dollar you give, a wealthy benefactor will add 25 cents. Your giving has a higher bang for the buck than normal.

Now imagine the charity instead tells you that your gift might help your taxes … but it probably won’t. In fact, there’s a 90 percent chance it will do nothing to reduce your tax burden. But there’s a small chance it will help. How much will it help? Hard to say; you might get anywhere from 10 to 37 percent of the donation back on your taxes next year, depending on a ton of other factors that have nothing to do with charity.

Which of these options sounds better to you? And more importantly: Which of them is more likely to spur you to donate?

The second option is how the United States charitable deduction currently works. It’s only available to people who “itemize” their deductions, meaning they eschew the standard deduction for specialized benefits based on mortgage payments, state taxes, and other factors. But barely 9 percent of filers even did that in 2021, and they are disproportionately wealthy ones.

How much the charitable deduction reduces your taxes, and thus benefits you, depends on your tax bracket, which means it could be worth as little as 10 percent of your gift or as much as 37 percent. It’s a complex, difficult-to-understand program, which surely limits how effective it can be at its main goal: encouraging Americans to give to charity.

The first option, the 25 cents on the dollar match? That’s what the United Kingdom does. When you donate to a charity there, you can check a box confirming you’re a UK taxpayer. The charity then gets a 25 percent match from the government on all donations from taxpayers.

The program is called Gift Aid, and it has helped the UK preserve its system of pay-as-you-earn income taxes, in which about two-thirds of Britons don’t have to file tax returns at all. Most things that would be deductions in the US instead exist outside the tax system in the UK, in programs like Gift Aid. It seems to work at making giving more popular: A recent global survey found that 71 percent of Britons donated to charity, compared to 61 percent of Americans, and a sharp contrast from the very low rates of giving in much of mainland Europe (37 percent in France, 42 percent in Italy).

It’s a simpler way to incentivize charity, and as Tax Policy Center economist Robert McClelland explains in a new report, it’s a more effective way too.

Many studies suggest matches are more effective than deductions

In recent decades, economists and psychologists have taken to conducting studies trying to uncover biases in the way people respond to economic situations, a research program known as “behavioral economics.” For instance, people tend to be more sad about losing something they have than happy when gaining something of equivalent value (“loss aversion”); they tend to put undue weight on the first thing they hear about a certain subject (“anchoring bias”).

Partly due to this research program, a number of economists have conducted experiments to see whether matching grants or a “rebate” like the charitable deduction work better. McClelland reviews many of these experiments and finds that they overwhelmingly show matches are more effective.

The team of Catherine Eckel and Philip Grossman conducted many of these trials. A paper of theirs in 2003 found that a match was about three times as effective as a rebate; a 2017 paper includes three experiments, all of which find matches are more effective if your goal is maximizing the ultimate resources of the charity.

Gift Aid means a simpler, fairer tax system

The UK model has other advantages too. Gift Aid functions as a universal, refundable charitable credit of 20 percent, available to all of its residents regardless of their tax bracket or situation. It is not solely available to a minority of taxpayers who claim a special set of itemized deductions. It is available to all Britons regardless of income. That means a wider share of donors get their philanthropic preferences reflected.

The administration is also simpler than a credit because donors need not remember their donations when filing taxes. Administration for charities is also relatively simple, requiring only a report of eligible donations to His Majesty’s Revenue & Customs. This is equivalent to the Form 990 reports already required of large charitable institutions in the United States. The additional reporting burden would be fairly minimal.

What’s more, this kind of approach would make it easier for the US to eliminate its itemized deductions, a long-held goal of tax reformers. Economists generally believe the home interest deduction is a disaster that makes homes more expensive and encourages excessive debt; the state and local tax deduction is mostly a regressive transfer to wealthy people in high-tax states. Eliminating the charitable deduction in favor of a Gift Aid program would reduce the number of people using these deductions too, by making itemizing less attractive overall.

If, as expected, Congress votes to continue the larger standard deduction passed as part of the Trump tax cuts in 2017 (and which is currently set to expire in 2025), these deductions will continue to be claimed by only a small share of taxpayers. Getting rid of the charitable deduction would make that share smaller still, and help shrink itemized deductions to a size where they might be junked entirely.

A Gift Aid program would also eliminate certain key abuses of the charitable deduction. In recent years, wealthy donors have flocked to “donor-advised funds,” investment vehicles at financial institutions like Fidelity or Charles Schwab that promise their proceeds will eventually be dispersed to charitable institutions. Donors receive immediate charitable deductions for their contributions to these funds, irrespective of when or even if their donations are actually dispersed (there is no time limit within which they have to spend the money). This has provoked attempts at reform meant to speed disbursement, but as of this writing, no reform has passed Congress.

More daringly, some taxpayers have used the charitable deduction to subsidize what amounts to personal consumption. A number of wealthy art collectors have in recent decades claimed large deductions for donations to museums they themselves have created — and which are rarely, if ever, open to the public. The Brant Foundation Art Study Center, located close to the home of its benefactor Peter Brant in Greenwich, Connecticut, provided Brant with tax breaks for all the art he endowed it with, despite only being open to the public by appointment.

Without a charitable deduction, these kinds of abuses would not be possible, and they would not be possible under a Gift Aid regime either. While a billionaire-controlled nonprofit art museum would be eligible for Gift Aid reimbursement, it would be legally required to use that money to further its philanthropic mission. By contrast, money a taxpayer saves due to the charitable deduction could be legally used for any purpose. Donor-advised funds could give to charities that then in turn receive Gift Aid subsidy, but the subsidy would only come when the funds were actually dispersed.

2025 is a time to get creative about taxes

While much of the focus today is on this year’s taxes — get them in by the end of the day — next year is set to be one of the most consequential years in a long while for the federal tax code.

Most of the individual provisions of the 2017 Trump tax cuts — the rate cuts, the larger standard deduction and child credit, limits on the state and local and mortgage interest deductions — are expiring. With Trump wanting to defend his legacy and Biden refusing to raise taxes on people earning under $400,000 a year, both parties desperately want to preserve the bulk of these cuts.

One of my biggest hopes is that they do this in a way that makes the code overall less, not more, complicated and reduces taxpayers’ burden in time and energy. Replacing the charitable deduction with a Gift Aid program would go a long way toward that, pushing the US further away from specialized deductions for this and that and toward a simpler system where everyone at a given income pays the same amount.


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