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Giving USA Gets the Incentives Half Right

Summary:
“After reaching record-breaking levels of giving in 2017, American individuals and organizations continued their generous support of charitable institutions in 2018,” said Rick Dunham, chair of Giving USA Foundation and CEO of Dunham + Company. “However, the environment for giving in 2018 was far more complex than most years, with shifts in tax policy and the volatility of the stock market. This is particularly true for the wide range of households that comprise individual giving and provide over two-thirds of all giving.” A number of competing factors in the economic and public policy environments may have affected donors’ decisions in 2018, shifting some previous giving patterns. Many economic variables that shape giving, such as personal income, had relatively

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“After reaching record-breaking levels of giving in 2017, American individuals and organizations continued their generous support of charitable institutions in 2018,” said Rick Dunham, chair of Giving USA Foundation and CEO of Dunham + Company. “However, the environment for giving in 2018 was far more complex than most years, with shifts in tax policy and the volatility of the stock market. This is particularly true for the wide range of households that comprise individual giving and provide over two-thirds of all giving.”

A number of competing factors in the economic and public policy environments may have affected donors’ decisions in 2018, shifting some previous giving patterns. Many economic variables that shape giving, such as personal income, had relatively strong growth, while the stock market decline in late 2018 may have had a dampening effect. The policy environment also likely influenced some donors’ behavior. One important shift in the 2018 giving landscape is the drop in the number of individuals and households who itemize various types of deductions on their tax returns. This shift came in response to the federal tax policy change that doubled the standard deduction. More than 45 million households itemized deductions in 2016. Numerous studies suggest that number may have dropped to approximately 16 to 20 million households in 2018, reducing an incentive for charitable giving.

This is from Giving USA, “Giving USA 2019: Americans gave $427.71 billion to charity in 2018 amid complex year for charitable giving,” June 18, 2019.

Strikingly, although individual contributions to charity to fell in real terms, they did not fall much. The report states:

Giving by individuals totaled an estimated $292.09 billion, declining 1.1% in 2018 (a decrease of 3.4%, adjusted for inflation).

Note in the second quoted paragraph above that the author at Giving USA understands that the doubling of the standard deduction caused many fewer people to itemize and that, therefore, the incentive to give to charity fell.

But there’s one incentive factor that the summary of the report totally misses. And this factor means that the steady state for future charitable giving by individuals is probably higher than the author at Giving USA expects. What is that factor?

HINT: Did people know before December 31, 2017 about the change in the tax code that would start in 2018?

David Henderson
David Henderson is a British economist. He was the Head of the Economics and Statistics Department at the OECD in 1984–1992. Before that he worked as an academic economist in Britain, first at Oxford (Fellow of Lincoln College) and later at University College London (Professor of Economics, 1975–1983); as a British civil servant (first as an Economic Advisor in HM Treasury, and later as Chief Economist in the Ministry of Aviation); and as a staff member of the World Bank (1969–1975). In 1985 he gave the BBC Reith Lectures, which were published in the book Innocence and Design: The Influence of Economic Ideas on Policy (Blackwell, 1986).

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