CBO

A

P A P E R

Effects of Allowing Nonitemizers

to Deduct Charitable Contributions

December 2002

The Congress of the United States ■ Congressional Budget Office 
Note

Numbers in the text and tables may not add up to totals because of rounding.
Preface

This Congressional Budget Office (CBO) report was prepared at the request of

the Ranking Member of the House Committee on Ways and Means. The report briefly

reviews the history of the standard deduction in the federal income tax, examines patterns

of charitable giving by itemizers and nonitemizers, and looks at the economic incentives

that the tax system offers for charitable giving. It also discusses options for extending the

deductibility of charitable donations to all taxpayers, focusing on revenue costs and the

effects on levels of giving. In accordance with CBO’s mandate to provide objective,

nonpartisan analysis, this report makes no recommendations.

Robert McClelland of CBO’s Tax Analysis Division prepared the report under the

supervision of G. Thomas Woodward and Roberton Williams. Kurt Siebert provided

assistance with data and figures. This paper benefited from comments by reviewers outside CBO, including Eugene Steuerle and Jane Gravelle. Within CBO, William Gainer,

Arlene Holen, Deborah Lucas, John Sturrock, David Weiner, and Dennis Zimmerman

provided comments.

Christine Bogusz edited the report, and Leah Mazade proofread it. Kathryn Winstead

prepared the report for publication, Lenny Skutnik produced the printed copies, and

Annette Kalicki prepared the electronic versions for CBO’s Web site.

Dan L. Crippen

Director

December 2002

This study and other CBO publications

are available at CBO’s Web site:

www.cbo.gov

CONTENTS

Summary and Introduction 1

History of the Charitable Deduction 3

Issues in Allowing Nonitemizers to Deduct Charitable Contributions 6

Who Contributes, and To Whom Do They Give? 7

Does the Deduction Stimulate Contributions? 9

How Will Itemizers Respond? 11

Will Tax Filing Be More Complicated, and Will Tax Evasion Increase? 13

An Analysis of Four Options 16

An Evaluation of Efficiency 16

The Four Options 19

Additional Ways to Reduce Revenue Loss 24

Appendixes

A Data and Methods 25

B Unit Price Elasticity and Revenue Loss 27
vi EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS

Tables

1. Percentage of Taxpayers in Each Tax Bracket and

the Associated Statutory Tax Price of Giving, 1999 10

2. Charitable Contributions Reported and Corrected,

by Itemization Status and Adjusted Gross Income, 1985 15

3. Effects in 1997 of Allowing a Nonitemizer Deduction

for Contributions Less Than or Equal To the

Standard Deduction 17

4. JCT’s Estimates of the Revenue Effects of the Charitable

Giving Incentive Provisions of H.R. 7 20

5. Effects in 1997 of Allowing a Nonitemizer Deduction

for Contributions Less Than or Equal To $100

($200 for Joint Filers) 21

6. Effects in 1997 of Allowing a Nonitemizer Deduction

for Contributions in Excess of $250 ($500 for Joint Filers) 22

7. Effects in 1997 of Allowing a Nonitemizer Deduction

for Contributions in Excess of Two Percent of Adjusted

Gross Income 23

Figures

1. Charitable Contributions by Itemizers and Nonitemizers,

by AGI Quintile, 1997 6

2. Percentage of Taxpayers Claiming the Standard Deduction,

by AGI Quintile, 1997 7

3. Recipients of Charitable Contributions by Nonitemizers

and Itemizers, 1995 8

4. Number of Itemizing Taxpayers in 1997 Switching to the

Standard Deduction, by Maximum Allowable Charitable

Deduction 13

5. Revenue Loss in 1997 from Itemizing Taxpayers

Switching to the Standard Deduction, by Maximum

Allowable Charitable Deduction 14
CONTENTS vii

6. Estimated Efficiency of Deduction Floors and Ceilings

Assuming an Elasticity of -0.6, by Total Revenue Loss, 1997 18

Box

1. The Administration’s Fiscal Years 2002 and

2003 Budget Proposals 4

1. Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2003 Revenue

Proposals (February 2002), p. 2.

Summary and Introduction

Under current law, taxpayers can deduct from taxable income gifts they make to qualified

charitable organizations only if they itemize their deductions on their tax return. Roughly

30 percent of taxpayers itemize deductions and can thus deduct charitable contributions;

the other 70 percent receive no explicit tax benefit for their contributions. Both the

Administration and some Members of Congress have proposed that taxpayers who elect

the standard deduction (“nonitemizers”) be allowed to deduct a limited amount of

charitable contributions. Under the Administration’s fiscal year 2003 budget proposal,

for example, the annual deduction would be limited to $100 ($200 for joint filers) in

2002 through 2004, rising incrementally to $500 ($1,000 for joint filers) after 2011.

The Administration asserts that the change “would help increase support for charitable

organizations by rewarding and encouraging giving by all taxpayers.”1 Because the proposal would reduce the amount of taxes people pay (by allowing them to increase the

amount they deduct), it would also reduce the revenue taken in by the Treasury. The

Administration estimates that its proposal would lower federal revenue by $32.6 billion

over the 2003-2012 period. Estimates made by the Joint Committee on Taxation (JCT)

put the 10-year revenue loss at $29.3 billion.

Being able to deduct contributions from their taxable income offers itemizers an incentive

to give to charity by reducing the net cost of that giving. Therefore, extending deductibility to people claiming the standard deduction ($4,550 for single taxpayers in 2001)

should increase contributions. Nonitemizers would also receive explicit recognition for

the contributions they made.

Some proponents of extending charitable deductions contend that the equity of the

income tax should be judged not on levels of income but on levels of consumption. Currently, a relatively generous taxpayer with, say, $40,000 in income and $4,000 in contributions who takes the standard deduction pays the same income tax as a taxpayer with

$40,000 in income and no contributions who takes the standard deduction, even though

the first taxpayer has less money available for private consumption. Therefore, in this

view, extending to nonitemizers the deduction for charitable giving improves the equity

of the income tax.

In principle, taxpayers who claim the standard deduction already receive recognition for

their charitable contributions under current tax law. But they typically select that deduction because it exceeds their deductible expenditures. If the Congress was to allow nonitemizers to deduct contributions in addition to taking the standard deduction, their total

deduction would further expand beyond their actual itemizable expenditures.
2 EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS

Several factors suggest that allowing nonitemizers to deduct charitable contributions may

have a relatively small impact on the overall level of giving. Because nonitemizers tend

to face lower tax rates than itemizers do, they would tend to have a weaker tax incentive

to contribute. Although estimates of the sensitivity to such incentives vary widely,

taxpayers who take the standard deduction may well be relatively insensitive to those

incentives. Thus, allowing them to deduct charitable contributions would be unlikely

to lead to a very large increase in giving. Furthermore, even a large proportionate increase

in giving by nonitemizers would be a small proportionate increase in total giving. The

Congressional Budget Office (CBO) estimates that nonitemizers gave about 20 percent

of all contributions in 1997, so a 20 percent increase in their giving would have increased

overall giving by only 4 percent.

Two additional factors would raise the cost of proposals (in terms of revenue loss) without

substantially increasing contributions. First, some taxpayers who itemize their deductions

could reduce their taxes by switching to the standard deduction and claiming a charitable

deduction, but their propensity to contribute would not change. Second, some taxpayers

may claim unsubstantiated contributions, which happened in 1985 when a deduction

for nonitemizers was allowed from 1982 through 1986.

This report looks at four ways of extending to nonitemizers the ability to deduct charitable contributions. The first option would allow them to claim an essentially unlimited

deduction. That approach would result in the greatest increase in contributions but would

also reduce revenue more than the other approaches would. Under a second option, contributions could be deducted up to a maximum amount, such as $100. That alternative

would be less expensive than an unlimited deduction; but since it offered no incentive

to contribute beyond the ceiling, it would probably stimulate contributions far less

effectively than an unlimited deduction would. Also, verifying such small amounts of

giving could prove difficult for the Internal Revenue Service (IRS) if large numbers of

taxpayers claimed the deduction. The third and fourth options would allow taxpayers

to deduct contributions only to the extent that they exceeded some threshold, such as

$250 or a fixed percentage of their adjusted gross income (AGI), respectively. Allowing

deductions above a floor amount would raise more contributions for any given revenue

loss than deductions below a ceiling would. However, a floor would offer little encouragement to taxpayers who currently do not contribute or who could not afford to contribute

more than the floor amount. All four options would be likely to increase overall contributions by less than 4 percent, and their primary effect, as is the case with most deductions, would be to reward taxpayers for their existing behavior.
EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS 3

2. Amy Dunbar and John Phillips, “The Effect of Tax Policy on Charitable Contributions: The Case

of Nonitemizing Taxpayers,” a supplement to the Journal of the American Taxation Association, vol. 19

(1997), p. 5.

History of the Charitable Deduction

Almost from its inception in 1913, the federal income tax has allowed taxpayers to subtract from their taxable income amounts spent for particular uses. For example, beginning

in 1917, taxpayers could deduct donations made to charitable causes. To claim the deduction, taxpayers had to itemize their allowable expenditures. That itemization imposed

a burden on taxpayers, but relatively few people were affected because only about 5 percent of households had to file tax returns.

World War II dramatically increased the reach of the income tax: by 1944, nearly threefourths of households had to pay the tax. With that expansion came concern about the

complexity of tax filing. To simplify tax returns, in 1944 the Congress created the standard deduction, then equal to 10 percent of a taxpayer’s annual income, up to a maximum of $500. Taxpayers could select the standard deduction as an alternative to itemizing their expenditures on specific activities, reducing their taxes as if they had made that

level of deductible expenditures but without having to comply with recordkeeping and

reporting requirements. By taking the standard deduction, people are generally claiming

deductions that are greater than their actual expenditures would have been if they had

itemized.

A substantial majority of taxpayers claim the standard deduction today, thus simplifying

both the preparation of tax returns and their auditing by the IRS. In 2000, for example,

about 64 percent of tax returns had claims for the standard deduction.

As part of the Economic Recovery Tax Act of 1981, the Congress created a deduction

for charitable contributions made by nonitemizers. The deduction was designed to be

phased in over five years and then to expire. In 1982 and 1983, nonitemizers could deduct 25 percent of their first $100 of charitable contributions. In 1984, the limit was

raised to $300. In 1985, 50 percent of all contributions were deductible; in 1986,

nonitemizers could deduct 100 percent of all contributions. The deduction expired in

1987.

By 1984, however, the Treasury Department had concluded that such a deduction should

not be extended because “the contribution deduction to non-itemizers creates unnecessary

complexity, while probably stimulating little additional giving and presenting the IRS

with a difficult enforcement problem.”2
4 EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS

3. Dunbar and Phillips, “The Effect of Tax Policy on Charitable Contributions.”



The Administration’s Fiscal Years 2002 

and 2003 Budget Proposals

In each of the past two years, the Administration has proposed allowing nonitemizers (taxpayers who claim the standard deduction) to deduct charitable contributions on their income tax returns. The two proposals and their projected revenue costs are described below

and in the table on page 5.

Fiscal Year 2002 Proposal: Taxpayers who did not itemize would be allowed to deduct

charitable contributions in addition to claiming the standard deduction, but the deduction

for contributions would be limited to the amount of a taxpayer’s standard deduction.

Charitable contributions in excess of the standard deduction could not be carried forward

and deducted in future years. The proposal would be effective for charitable contributions

beginning in tax year 2002 and would be phased in between 2002 and 2006. Nonitemizers

would be allowed to deduct 20 percent of contributions in 2002, rising to 40 percent in

2003, 60 percent in 2004, 80 percent in 2005, and finally 100 percent of contributions

in 2006 and beyond.

Fiscal Year 2003 Proposal: Taxpayers who did not itemize would be allowed to deduct

contributions in addition to claiming the standard deduction, effective for tax years

beginning in 2003. The deduction would be phased in between 2002 and 2012 as follows:

taxpayers would be allowed a maximum deduction of $100 ($200 for joint filers) in 2002

through 2004, $300 ($600 for joint filers) in 2005 through 2011, and $500 ($1,000 for

joint filers) in 2012 and beyond.

During the Congressional discussion surrounding the Tax Reform Act of 1986, the

House attempted to address those issues by voting to keep a deduction for contributions

above a floor of $100:

Allowing a non-itemizer deduction for relatively low levels of giving may

impose recordkeeping burdens and complexity for many short-form filers,

and create enforcement problems for the Internal Revenue Service. Accordingly, the committee has concluded that the non-itemizer deduction should

be available only to the extent that the taxpayer’s total charitable contributions for the year exceed $100.3
EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS 5



Continued

Estimated Revenue Effects of the Administration’s

Fiscal Years 2002 and 2003 Proposals (In millions of dollars)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

FiveYear

Total

TenYear

Total

Fiscal Year 2002 Proposal

Treasury -482 -1,690 -2,963 -4,448 -6,065 -6,988 -7,087 -7,306 -7,500 -7,642 n.a. -15,648 -52,171

JCT -223 -1,764 -3,665 -5,965 -8,571 -10,573 -12,066 -12,865 -13,834 -14,838 n.a. -20,188 -84,363

Fiscal Year 2003 Proposal

Treasury -570 -1,429 -1,437 -2,288 -3,567 -3,591 * * * * * -12,312 -32,636

JCT -249 -1,255 -1,301 -1,718 -3,329 -3,335 -3,381 -3,428 -3,446 -3,529 -4,558 -10,938 -29,280

Sources: Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2002 Tax Relief Proposals

(April 2001) and General Explanations of the Administration’s Fiscal Year 2003 Revenue Proposals (February

2002); and Joint Committee on Taxation, Estimated Revenue Effects of the President’s Fiscal Year 2002 Budget

Proposal (May 2001) and Estimated Revenue Effects of the President’s Fiscal Year 2003 Budget Proposal (March

2002).

Notes: Five- and 10-year totals for the 2002 proposal begin with fiscal year 2002; those for the 2003 proposal begin with fiscal

year 2003.

n.a. = not applicable; * = not available.

Ultimately, however, the Congress chose not to extend the deduction in the Tax Reform

Act of 1986.

In the past several years, the Congress has expressed renewed interest in a charitable

deduction for nonitemizers, crafting several proposals to that effect. For example, H.R.

1338 (from the 105th Congress) would have amended the tax code to allow nonitemizers

to deduct total charitable contributions in excess of $1,000 ($2,000 for joint filers). The

Administration’s 2002 budget proposal included a nonitemizer deduction for total annual

contributions less than or equal to the standard deduction; its 2003 proposal includes

a deduction capped at $100 ($200 for joint filers) in 2002 through 2004, rising to $500

($1,000) in 2012 (see Box 1). In the current Congress, H.R. 7, as approved by the House

(the Community Solutions Act of 2001) would allow an annual deduction capped at

$25 ($50 for joint filers) in 2002 and 2003, rising to $100 ($200 for joint filers) in 2010.

As reported by the Senate Finance Committee, H.R.7 (the CARE Act of 2002) would
6 EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS

4. The analysis in the following two sections uses the data and methods described in Appendix A. That

analysis ignores provisions that are scheduled to expire, such as the Pease itemized deduction phase-out

and the personal exemption phase-outs. In an “Economic Perspective” column written for the organization Tax Analysts on March 20, 2000, C. Eugene Steuerle shows that this issue is not trivial.

Lowest Second Middle Fourth Highest

0

10

20

30

40

50

60

70

80

90 Itemizers

Nonitemizers

Income Quintile (Based on adjusted gross income)

 	

Charitable Contributions by Itemizers and Nonitemizers,

by AGI Quintile, 1997

(Billions of dollars)

Source: Congressional Budget Office based on analyses of the 1998 Survey of Consumer Finances, the 1997 Consumer Expenditure

Survey, and 1997 Statistics of Income data.

Notes: Total charitable contributions by itemizers were $99 billion in 1997; total contributions by nonitemizers equaled $21 billion

in that year.

Each quintile represents one-fifth of the income distribution.

allow a deduction for total contributions that exceeded $250 ($500 for joint filers) in

2002 and 2003. The deduction would be limited to $250 ($500 for joint filers) each year.

Issues in Allowing Nonitemizers to Deduct

Charitable Contributions

Reimplementation of a deduction for nonitemizers raises several key questions.4 Which

taxpayers make charitable contributions, and to whom do they give? To what extent will
EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS 7

Lowest Second Middle Fourth Highest

0

20

40

60

80

100

Income Quintile (Based on adjusted gross income)

the deduction increase charitable giving? How will itemizers respond? Will the deduction

complicate tax filing, and will tax evasion increase?

Who Contributes, and To Whom Do They Give?

CBO estimates that individuals contributed about $120 billion to charitable causes in

1997. Of that amount, two-thirds (about $78 billion) was contributed by taxpayers in

the top quintile—or fifth—of the income distribution, based on adjusted gross income

(see Figure 1). The fourth quintile contributed almost half of the remainder, or about

$20 billion. The bottom three quintiles collectively contributed about $21 billion.

Charitable contributions by nonitemizers rose slowly across income quintiles. In contrast,

contributions by taxpayers who itemize their deductions rose dramatically with income,

reflecting not only an increasing number of itemizers and higher average giving as income

increased but also a response to the incentive to contribute provided by the deductibility

of those contributions. Those factors resulted in itemizers in the top quintile accounting

for about 60 percent of all charitable contributions made in that year.

 
	

Percentage of Taxpayers Claiming the Standard Deduction,

by AGI Quintile, 1997

(Percent)

Source: Congressional Budget Office analysis of 1997 Statistics of Income data.

Note: Each quintile represents one-fifth of the income distribution.
8 EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS



	









	
 	






	











	







 



	









Some of the estimated $99 billion in charitable contributions made by itemizers in 1997

would have been made in the absence of any tax incentive. All of the $21 billion in contributions by taxpayers who claimed the standard deduction were made without any tax

incentive.

Low-income taxpayers tend to take the standard deduction more than higher-income

taxpayers do. More than 95 percent of taxpayers in the lowest income quintile claimed

the standard deduction in 1997, whereas less than 20 percent of those in the top income

quintile claimed it (see Figure 2 on page 7). About 80 percent of taxpayers who claimed

the standard deduction in that year were in the lowest three quintiles.

Taxpayers who claim the standard deduction tend to give to the same types of organizations as taxpayers who itemize, according to survey data from 1996 (see Figure 3). For

example, both types of taxpayers give approximately 60 percent of their contributions

to religious organizations. Contributions to human services organizations, health institutions, and educational institutions constitute roughly one-quarter of the total for both

itemizers and nonitemizers.

Those numbers should be interpreted with caution, however. The same data indicate

that the percentage of contributions going to religious organizations is larger for households with lower income. If nonitemizers tend to have lower income than itemizers have,

that pattern suggests that nonitemizers should tend to give a greater proportion of their

contributions to religious organizations.

 	

Recipients of Charitable Contributions by Nonitemizers

and Itemizers, 1995

Source: Congressional Budget Office based on data from Giving and Volunteering in the United States (1996).
EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS 9

5. Exceptions include taxpayers who are already contributing the maximum deductible amount. For

them, an extra dollar of contributions offers no tax savings.

6. The Economic Growth and Tax Relief Reconciliation Act of 2001 reduced the 28 percent and 31 percent tax brackets to 27 percent and 30 percent, respectively.

7. Research from that time is typified in testimony such as that in U.S. Senate, Charitable Contribution

Deductions, hearings before the Subcommittee on Taxation and Debt Management Generally of the

Senate Committee on Finance, 96th Cong., 2nd sess. (January 30 and 31, 1980), p. 219. 

Does the Deduction Stimulate Contributions?

The ability to deduct charitable contributions offers itemizing taxpayers an incentive to

contribute, regardless of their income, by reducing the cost of giving (net of tax savings).

For example, consider a taxpayer in the 15 percent tax bracket who itemizes her deductions. If she contributes an additional dollar, in most cases she may increase her deductions by a dollar.5

 That increase lowers her taxable income by one dollar and her taxes

by 15 cents, so the after-tax cost of her additional donation of one dollar (the “tax price”)

is only 85 cents. An otherwise identical taxpayer who claims the standard deduction

cannot reduce her taxable income, so her cost of donating an additional dollar is one

dollar.

Itemizing taxpayers in higher tax brackets face a stronger incentive to give because their

tax price is lower: in 1999, it was 72 cents for a taxpayer in the 28 percent bracket,

69 cents for a taxpayer in the 31 percent bracket, and so on.6

 The progressivity of the

tax code (rates increase as income rises), along with the income distribution of taxpayers

taking the standard deduction, implies that nonitemizers tend to face lower tax rates;

therefore, they would have a relatively weak incentive to give if they were allowed to

deduct their charitable contributions. In 1999, about 70 percent of nonitemizers faced

a 15 percent tax rate and hence would see their tax price of giving decrease by 15 percent,

from one dollar to 85 cents (see Table 1). Less than 1 percent of itemizers faced a rate

above 28 percent. In contrast, only about 40 percent of itemizers were in the 15 percent

tax bracket, and about the same percentage were in the 28 percent bracket. The average

tax rate for nonitemizers was almost 16 percent, whereas taxpayers who itemize had an

average rate of about 23 percent.

Research done before 1995 suggested that contributions by itemizing taxpayers were sensitive to tax rates. That sensitivity—measured as the percentage change in contributions

from a 1 percent change in the tax price—is known as a price elasticity. Estimated elasticities ranged from -1.0 to -1.4, with many near -1.2.7

 At that time, it was believed that

a 10 percent decrease in the tax price would increase contributions by about 12 percent.

Those estimates generally applied to itemizing taxpayers, who tend to have high income.
10 EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS

8. Ibid, p. 227.

9. See, for example, William Randolph, “Dynamic Income, Progressive Taxes, and the Timing of

Charitable Contributions,” Journal of Political Economy, vol. 103, no. 4 (August 1995), pp. 709-738;

Jon Bakija, “Distinguishing Transitory and Permanent Price Elasticities of Charitable Giving with

Pre-Announced Changes in Tax Law” (manuscript, Williams College, Williams, Mass., January 2002);

Kevin Barrett and others, “Further Evidence on the Dynamic Impact of Taxes on Charitable Giving,”

National Tax Journal, vol. 50, no. 2 (June 1997), pp. 321-334; and Ralph Bradley and others, “A

Robust Estimation of the Effects of Taxation on Charitable Contributions” (manuscript, Bureau of

Labor Statistics, January 2002). Some of the larger of recent estimates (-0.8 to -1.2) may be found

in Gerald E. Auten and others, “Charitable Giving, Income, and Taxes: An Analysis of Panel Data,”

American Economic Review, vol. 92, no. 1 (March 2002), pp. 371-382. 


 	

Percentage of Taxpayers in Each Tax Bracket and 

the Associated Statutory Tax Price of Giving, 1999

Tax Bracket

Statutory

Tax Price

(Dollars)

Nonitemizers

(Percent)

Itemizers

(Percent)

No Taxable Income 1.00 17.3 6.3

15 Percent 0.85 69.9 39.3

28 Percent 0.72 11.9 40.4

31 Percent 0.69 0.6 7.0

36 Percent 0.64 0.1 3.0

39.6 Percent 0.604 0.1 1.9

Alternative Minimum Tax 0.76/0.72 0.1 2.2

Memorandum:

Average Tax Ratea n.a. 15.8 23.0

Source: Congressional Budget Office analysis of 1999 Statistics of Income data.

Note: n.a. = not applicable.

a. The average tax rate uses statutory marginal rates modified by tax provisions limiting deductions and personal exemptions.

The sensitivity of low-income individuals to tax rates was and is subject to much greater

uncertainty.8

Reflecting the use of more-sophisticated statistical analyses, recent research suggests that

the price elasticity of contributions by itemizers is more likely to be in the range of -0.4

to -0.8.9 If those estimates more accurately reflect taxpayer behavior, then a 10 percent

decrease in the tax price would increase itemizers’ contributions by between 4 percent

and 8 percent.
EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS 11

10. Dunbar and Phillips, “The Effect of Tax Policy on Charitable Contributions.”

11. Chris Duquette, “Is Charitable Giving by Non-itemizers Responsive to Tax Incentives? New Evidence,” National Tax Journal, vol. 52, no. 2 (June 1999), pp. 195-206. 

12. Jane Gravelle, Economic Analysis of the Charitable Contribution Deduction for Non-itemizers, CRS

Report for Congress RL31108 (Congressional Research Service, August 31, 2001), p. 6. This estimate

used additional results from Duquette (see note 11), which may overestimate the sensitivity of nonitemizers to the tax price, as Gravelle pointed out in her Congressional Research Service memorandum

of August 16, 2002. An estimate of -0.1, therefore, may be too large.

13. Joseph Cordes, John O’Hare, and Eugene Steuerle, “Extending the Charitable Deduction to Nonitemizers: Policy Issues and Options” (Washington, D.C.: Urban Institute, May 2000). The elasticities

used were -0.4, -1.0, and -1.4.

The effect of the tax incentive on nonitemizers is much more difficult to estimate because

all taxpayers who claim the standard deduction face the same tax price. Only by examining data from 1982 to 1986—when nonitemizers could deduct part or all of their

charitable contributions—can researchers observe the effect of tax prices on nonitemizers.

Because the maximum allowable deduction was quite low from 1982 to 1984, researchers

are generally restricted to using data from 1985 (when one-half of all contributions were

deductible by nonitemizers) and 1986 (when all contributions were deductible). Consequently, research on the sensitivity of nonitemizers to tax incentives reveals a wide range

of estimates.

For example, a recent study estimated the elasticity of nonitemizers in 1985 and 1986

as -3.4.10 That number, however, is highly suspect, for several reasons. First, an enormous

change in tax law occurred in 1986 with enactment of the Tax Reform Act. Taxpayers’

behavior around that time would have reflected not only tax incentives for nonitemizers

but also anticipated changes under the law. Second, when the study’s authors (Dunbar

and Phillips) used a different statistical method, they found no evidence that contributors

would respond to tax incentives at all. Third, another researcher, using the same data,

estimated the elasticity as -0.6 to -0.8.11 And a recent Congressional Research Service

report estimated an elasticity of only -0.1.12 Confronted by such a degree of uncertainty,

researchers at the Urban Institute used a range of possible elasticities when estimating

the effect of a deduction for nonitemizers.13 This paper follows that approach, using elasticities of -0.2, -0.6, and -1.0.

How Will Itemizers Respond?

If there was a charitable deduction for nonitemizers, some itemizing taxpayers would

reduce their taxes by switching to the standard deduction, even though charitable con-
12 EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS

14. Itemizing taxpayers would find their tax incentive unchanged but might contribute a small fraction

of the tax savings.

tributions would increase little, if at all.14 For example, imagine a single taxpayer, with

$800 in charitable contributions and $4,000 in other deductions, whose income is in

the 27 percent bracket. Because the $4,800 in deductions is higher than the standard

deduction of $4,550, his taxable income (and therefore his taxes) will be lower if he

itemizes. His tax price of contributing an extra dollar is then 73 cents. But if the Congress

enacted an unlimited deduction for nonitemizers, his tax bill would be lower if he claimed

the standard deduction of $4,550 and a charitable deduction of $800 because his

deductions would total $5,350. His taxes would be reduced by $148.50, and the tax price

he faced would still be 73 cents. In other words, he would face no additional incentive

to contribute but would decrease his taxes by $148.50. Note, however, that he would

continue to itemize his deductions if the nonitemizer deduction was limited to a maximum of $200. In that case, the sum of the standard deduction ($4,550) and the $200

allowable deduction would be $4,750, less than the $4,800 in itemized deductions he

could claim. Therefore, limiting the deduction for nonitemizers reduces the number of

itemizing taxpayers who would benefit from switching to the standard deduction.

Nonetheless, even if they could deduct only small amounts of charitable contributions,

a large number of itemizing taxpayers would have an incentive to switch to the standard

deduction (see Figure 4). For example, if a maximum of $100 in contributions ($200 for

joint filers) could have been claimed in 1997, about 450,000 itemizing taxpayers could

have benefited from claiming the standard deduction and taking the nonitemizer deduction for charitable contributions. A $500 maximum ($1,000 for joint filers) could have

induced about 1.3 million itemizing taxpayers to switch their status, and almost 2 million

itemizing taxpayers could have benefited from switching to the standard deduction if

the ceiling had been $1,000 ($2,000 for joint filers). Of course, not all of those itemizing

taxpayers would necessarily have switched to the standard deduction immediately after

the charitable deduction was allowed. However, it is reasonable to expect that over time,

nearly all itemizers who could save money by switching to the standard deduction and

then deducting charitable contributions would do so.

Consistent with that pattern, the potential revenue loss from itemizers switching to the

standard deduction would increase as the limit on deductible contributions rose (see Figure 5). A charitable deduction of up to $100 ($200 for joint filers) in 1997 would have

cost more than $50 million in lost revenue if all itemizers for whom not itemizing made

sense actually switched. That loss would have increased to almost $140 million if the

deduction limit had been $500 ($1,000 for joint filers) and nearly $300 million if the

ceiling had been $1,000 ($2,000 for joint filers).
EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS 13

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000

0.0

0.5

1.0

1.5

2.0

2.5

Maximum Allowable Charitable Deduction

 	

Number of Itemizing Taxpayers in 1997 Switching to the

Standard Deduction, by Maximum Allowable Charitable Deduction

(Millions of taxpayers)

Source: Congressional Budget Office analysis of 1997 Statistics of Income data.

Notes: This figure shows the number of itemizing taxpayers who would have benefited by switching to the standard deduction in

1997 (without increasing their charitable contributions) if a charitable deduction for nonitemizers had been allowed in that

year.

The number of itemizers switching their status was calculated by using a maximum deduction for joint filers equal to twice

that shown on the horizontal axis. For example, the number of switchers from a maximum deduction of $100 was calculated

by assuming that taxpayers filing jointly had a $200 maximum deduction.

Will Tax Filing Be More Complicated, and Will Tax Evasion Increase?

Adding a deduction for charitable contributions for taxpayers claiming the standard

deduction would increase the recordkeeping burden for some taxpayers but could reduce

it for others. Contributors taking the standard deduction would have to keep records

verifying their charitable contributions, whereas previously they did not. But the burden

might be reduced for itemizers under current law who would be certain to take the standard deduction if contributions were deductible for nonitemizers; those taxpayers would

no longer be required to keep records of all their other deductions.

When a charitable deduction was available to nonitemizers during the early to mid-1980s,

the percentage of unverified contributions by nonitemizers was nearly twice the percentage by itemizers. Under the Tax Compliance Measurement Program (TCMP), a small

number of randomly selected returns were carefully audited, and unsubstantiated deduc-
14 EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS

15. Taxpayers were required to maintain written records to substantiate all of their claimed deductions.

For noncash contributions in excess of $500, taxpayers also had to complete Form 8283.

$0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000

0

50

100

150

200

250

300

350

Maximum Allowable Charitable Deduction

 	

Revenue Loss in 1997 from Itemizing Taxpayers

Switching to the Standard Deduction, by Maximum 

Allowable Charitable Deduction

(Millions of dollars)

Source: Congressional Budget Office analysis of 1997 Statistics of Income data.

Notes: This figure shows the revenue loss that would have resulted in 1997 from itemizing taxpayers switching to the standard

deduction if they would have benefited by doing so (without increasing their charitable contributions), assuming that a

charitable deduction for nonitemizers had been allowed in that year.

The revenue loss was calculated by using a maximum deduction for joint filers equal to twice that shown in the horizontal

axis. For example, the revenue loss from a maximum deduction of $100 was calculated by assuming that taxpayers filing jointly

had a $200 maximum deduction.

If the maximum allowable deduction had equaled the standard deduction, the revenue loss could have been as large as $1.0

billion.

tions were disallowed.15 Because 50 percent of all contributions by itemizers and nonitemizers were deductible in 1985, the TCMP in that year may be used to compare the

overreporting of the two groups.
EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS 15

16. David Joulfaian, “Compliance Patterns in Claimed Deductions for Charitable Contributions”

(memorandum, Department of the Treasury, Washington, D.C., June 5, 2001).

17. Dunbar and Phillips, “The Effect of Tax Policy on Charitable Contributions.”


 
	

Charitable Contributions Reported and Corrected,

by Itemization Status and Adjusted Gross Income, 1985

Reported Corrected

Adjusted Gross Income

Number of

Taxpayers

(Millions)

Amount

Claimed

(Billions

of dollars)

Number of

Taxpayers

(Millions)

Amount

Claimed

(Billions

of dollars)

Reduction

in Claimed

Giving

(Percent)

Nonitemizers

Below $25,000 19.5 3.5 16.8 2.8 20.8

Above $25,000 4.7 1.1 4.4 1.0 8.2

Total 24.2 4.6 21.2 3.8 17.8

Itemizers

Below $25,000 9.2 6.9 8.5 6.1 12.1

Above $25,000 25.5 35.9 24.6 32.6 9.0

Total 34.7 42.8 33.1 38.7 9.5

Source: Congressional Budget Office based on David Joulfaian, “Compliance Patterns in Claimed Deductions for Charitable Contributions” (memorandum, Department of the Treasury, Washington, D.C., June 5, 2001).

Note: Adjusted gross income is defined as corrected AGI plus excluded capital gains.

Overall, less than 10 percent of contributions by itemizers were disallowed, compared

with almost 18 percent for nonitemizers (see Table 2).16 Among nonitemizers, the difference between those with AGI below $25,000 and those with AGI above $25,000 is

striking: 20.8 percent versus 8.2 percent, respectively. That difference may reflect the

view of those taking the deduction that they faced little chance of being caught. As the

Treasury Department wrote in 1984:

Non-itemizers generally make smaller charitable gifts than itemizers. A deduction may be claimed for numerous small gifts, made to a number of

different organizations. It is extremely difficult and expensive for the Internal

Revenue Service to monitor these deductions. Further, the cost of administration is disproportionate to the amount involved. These factors may prompt

dishonest taxpayers to conclude that they can misrepresent their charitable

gifts with impunity.17
16 EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS

18. In all of the options examined in this report, the charitable deduction cannot exceed the standard

deduction. Without that limit, the options would apply to some taxpayers who already should be

itemizing their contributions.

19. In each case, CBO assumes that all taxpayers have the same tax price elasticity and that the increase

in giving occurs among existing contributors. This elasticity is measured as a point elasticity rather

than as an arc elasticity. Using an arc elasticity produces slightly higher increases in contributions and

revenue losses.

An Analysis of Four Options

Four methods for extending the charitable deduction to nonitemizers have been proposed:18 allow taxpayers who claim the standard deduction to deduct all charitable contributions, allow them to deduct all contributions up to a maximum amount (or ceiling),

allow them to deduct only contributions above a minimum dollar amount (or floor),

or allow them to deduct only contributions above a minimum percentage of AGI. This

report analyzes each approach using the data and methods described in Appendix A. It

estimates the increased contributions per dollar of revenue loss (efficiency) that might

result and examines in detail specific proposals for each option. Because of the uncertainty

about how nonitemizers would adjust their level of charitable contributions in response

to a shift in their tax price, the estimates use a range of elasticities.19 None of the estimates

of revenue loss include the effects from tax evasion, so those estimates should be treated

as lower bounds.

Of the four options, an essentially unlimited deduction would increase contributions

the most but would be the costliest in terms of revenue loss. Lowering the cost by setting

either a dollar or a percentage floor on deductions would increase contributions by far

more than capping the deduction would (with the same revenue cost). In each case, most

of the cost would come from itemizers switching to the standard deduction and from

the new deductibility of contributions that would have been made even without the

deduction. Revenue loss might be further mitigated either by lowering the existing

standard deduction or by applying the same floor or ceiling on deductibility to the

contributions of taxpayers who itemize their deductions. Before explaining each option

in detail, this paper first discusses the options on the basis of their efficiency.

An Evaluation of Efficiency

A stated purpose of allowing nonitemizers to deduct contributions is to increase the overall amount of charitable giving. But that gain comes at the cost of forgone revenue. One

measure of the efficiency of each option is the increase in giving it induces (measured

as a percentage of the total revenue loss). Ideally, the increase in contributions would

equal or exceed the loss of revenue. In reality, however, such a balance is unlikely: CBO

estimates that an unlimited deduction would induce contributions equal to the revenue
EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS 17

20. This includes the revenue loss from “switchers.” See Appendix B for more information.

21. Different assumptions of elasticities produce different levels of efficiency. However, the qualitative

relationships among unlimited deductions, deduction floors, and deduction ceilings are the same

regardless of the elasticity assumed.


 	

Effects in 1997 of Allowing a Nonitemizer Deduction

for Contributions Less Than or Equal To the Standard

Deduction

Change in

Contributions

Sources of Revenue Loss Increased Increase

(Billions of dollars) Contribu- in Total

Itemizers tions ContribuIncreased Existing Switching Total (Billions tions

Elasticity Giving Giving Status Loss of dollars) (Percent)

0 0 3.8 1.0 4.9 0 0

-0.2 0.1 3.8 1.0 5.0 0.7 0.6

-0.6 0.4 3.8 1.0 5.3 2.1 1.8

-1.0 0.7 3.8 1.0 5.6 3.5 2.9

Source: Congressional Budget Office.

Note: For an explanation of the final row of this table, see Appendix B.

loss only if the tax price elasticity of nonitemizers was about -1.7, which is substantially

greater in absolute value than most elasticity estimates.20 Although increased contributions

would probably be less than the revenue loss they induced, some methods for implementing a deduction for nonitemizers are more efficient than others.

For example, an unlimited deduction would undoubtedly increase contributions more

than any other option would. If an unlimited deduction had been in place in 1997, it

would have raised contributions by as much as $3.5 billion, CBO estimates, depending

on how responsive nonitemizers were to a change in the tax price of giving (see Table

3). That increase would have been accompanied by the greatest reduction in revenue of

any option, as much as $5.6 billion in 1997. If nonitemizers had had a tax price elasticity

of -0.6 (instead of -1.0), contributions would have increased by about 40 percent of the

revenue loss to the Treasury (see Figure 6).21

Capping the allowable deduction or allowing deductions only for donations above a floor

amount would reduce the revenue loss but would also yield a smaller amount of new
18 EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS

0123456

0

10

20

30

40

50

Total Revenue Loss (In billions of dollars)

$2,600 Floor

$1,000 Floor

$900 Ceiling

$200 Ceiling

"Unlimited" deduction in 

which the floor equals zero 

and the ceiling equals the 

standard deduction

Deduction Ceilings

Deduction Floors

 	

Estimated Efficiency of Deduction Floors and Ceilings

Assuming an Elasticity of -0.6, by Total Revenue Loss, 1997

(New contributions per dollar of revenue loss, in percent)

Source: Congressional Budget Office.

Note: The curves in this figure were created by interpolating among a small number of data points. Because the sampling error

may be substantial and varies from point to point, those curves should be viewed as rough approximations.

contributions. While both methods would reduce revenue and contributions, their

relative efficiency would differ.

Consider first a ceiling on deductions. If the ceiling equaled the standard deduction, it

would be equivalent to an unlimited deduction for nonitemizers. That is because under

current law, any taxpayer giving more than the standard deduction would have been

better off itemizing deductions. Although a lower ceiling would reduce the amount that

taxpayers making large contributions were able to deduct, it would still provide those

taxpayers with some tax relief. It would not, however, provide them with an incentive

to increase their contributions. Progressively lower ceilings would provide a tax incentive

to a progressively smaller group of taxpayers and offer tax cuts without that incentive

to a progressively larger group of taxpayers. For any given level of responsiveness to the

charitable deduction, the amount of new giving would decline faster than the revenue

loss, and the option’s efficiency—the new giving as a percentage of revenue loss—would

fall (see the lower line on Figure 6). In 1997, cutting the revenue loss in half by lowering

the ceiling to $900 ($1,800 for joint filers) might have reduced the efficiency of the option from 40 percent to less than 30 percent.
EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS 19

22. To see this, first consider randomly preventing taxpayers from claiming the deduction. On average,

this would cause the same proportionate decrease in new contributions and revenue loss, leaving efficiency unchanged. If, instead, taxpayers with weak tax incentives (or low tax sensitivities) were eliminated, efficiency would improve because the average increase in giving among the remaining taxpayers

would be greater.

23. Cordes, O’Hare, and Steuerle, “Extending the Charitable Deduction to Non-itemizers.” According

to the authors, if this option had been in effect in 1995, contributions would have increased by

between $2.3 billion and $8.0 billion. The authors’ estimates of the cost range from $5.6 billion to

$6.7 billion. 

In contrast, imposing a floor on deductible contributions could lead to increased efficiency as revenue cost declined. If the floor was set at zero, the option would be equivalent to an unlimited deduction in terms of both revenue loss and generation of new donations. A floor above zero would exclude taxpayers with small contributions, eliminating

the tax incentive and reducing the revenue loss. Excluding small contributors would

slightly increase efficiency if their tax rates— and hence their incentive to give—tended

to be low.22 Taxpayers making contributions above the floor amount would still be encouraged to give, but they would only receive a tax break on contributions exceeding

the floor, again increasing efficiency. Progressively higher floors would provide a tax

incentive to a progressively smaller group of taxpayers, reducing the revenue loss and

slightly raising efficiency (see the top line on Figure 6). In 1997, cutting the revenue loss

in half by raising the floor to $1,000 ($2,000 for joint filers) might have modestly raised

the efficiency of the option, from 40 percent to almost 45 percent.

The Four Options

This paper looks at four specific proposals to extend the deductibility of charitable contributions to nonitemizers. They are allowing an unlimited deduction, capping the deduction at $100, setting a $250 floor on deductions, or setting a floor on deductions of

2 percent of adjusted gross income.

Allow an Unlimited Deduction. An unlimited deduction in 1997 for nonitemizers would

have increased total charitable contributions by $0.7 billion to $3.5 billion, CBO estimates, an increase of between 0.6 percent and 2.9 percent. (As mentioned previously,

unlimited refers to contributions less than or equal to the standard deduction.) The

Treasury Department and the Joint Committee on Taxation have estimated the 10-year

cost of a phased-in version of such a deduction proposed by the Administration for 2002

as $52 billion and $84 billion, respectively (see Box 1 on page 5). Had that deduction been

fully phased in in 1997, CBO estimates, tax revenue would have dropped by between

$5.0 billion and $5.6 billion (see Table 3 on page 17).23 Of that loss, $100 million to $700

million would have resulted from new contributions. The first row in Table 3 shows the

revenue loss that would have occurred even if contributions did not change at all. That
20 EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS

revenue loss would have come from subsidizing existing donations ($3.8 billion) and from

taxpayers switching from itemizing deductions to taking the standard deduction

($1.0 billion).

Cap the Deduction at $100. Limiting the amount of contributions that a nonitemizing

taxpayer could deduct would reduce the loss of revenue. For example, H.R. 7 would limit

the deduction to $25 ($50 for married taxpayers filing a joint return) in 2003 and would

increase the maximum to $100 ($200 for joint filers) in 2010. The low ceiling on deductions would dramatically reduce the revenue loss from both of those proposals: JCT estimates that H.R. 7 would lower revenue by $1.3 billion when fully phased in in 2010

(see Table 4). If a limit of $100 ($200 for joint filers) had been in effect in 1997, the revenue loss in that year, assuming no overstatement of contributions, would have been $500

million or less (see Table 5). The losses from taxpayers deducting existing contributions

and from itemizers switching to the standard deduction would have been about $400

million. The Administration’s 2003 budget proposes a phased-in ceiling that would reach

$500 in 2012 ($1,000 for joint filers), which would reduce revenue by $29.3 billion to

$32.6 billion over 10 years (see Box 1 on page 5).

Although the maximum deduction would be capped under those proposals, the incentive

to contribute would still apply to contributions under the cap. In that way, taxpayers

who currently do not contribute to charitable causes would be encouraged to start giving.

Those taxpayers tend to have low income, so the deduction could induce many lowincome taxpayers to contribute. However, for the incentive to apply, they must owe

federal income taxes. Also, because low-income taxpayers tend to face low tax rates, their

incentive to contribute would be weaker than the incentive faced by taxpayers with higher

income.


 	

JCT’s Estimates of the Revenue Effects of the Charitable

Giving Incentive Provisions of H.R. 7

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Total,

2002-

2006

Total,

2002-

2011

Estimated

Revenue

Effect -40 -269 -316 -561 -573 -625 -876 -894 -966 -1,252 -1,759 -6,372

Source: Joint Committee on Taxation, “Estimated Revenue Effects of a Chairman’s Amendment in the Nature of a Substitute to H.R. 7,

the ‘Community Solutions Act of 2001,’ Scheduled for Markup by the Committee on Ways and Means on July 11, 2001"

(July 2001).
EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS 21

24. Gravelle, Economic Analysis of the Charitable Contribution Deduction for Non-itemizers.


 	

Effects in 1997 of Allowing a Nonitemizer Deduction

for Contributions Less Than or Equal To $100

($200 for Joint Filers)

Change in

Contributions

Sources of Revenue Loss Increased Increase

(Billions of dollars) Contribu- in Total

Itemizers tions ContribuIncreased Existing Switching Total (Billions tions

Elasticity Giving Giving Status Loss of dollars) (Percent)

0 0 0.4 0.1 0.4 0 0

-0.2 * 0.4 0.1 0.4 * **

-0.6 * 0.4 0.1 0.4 * **

-1.0 * 0.4 0.1 0.5 * **

Source: Congressional Budget Office.

Note: * = less than $50 million; ** = less than 0.05 percent.

This option would result in little additional giving by current contributors because it

would not give them an incentive to make contributions above the ceiling. CBO estimates that if a ceiling of $100 ($200 for joint filers) had been in place in 1997, it would

probably have spurred total additional contributions of less than $50 million, or onetwentieth of 1 percent of total contributions, because the majority of contributors were

already giving at least $100 or $200 per year (see Table 5). A recent study estimated that

about 70 percent of nonitemizers who contributed in 1999 gave more than $100, and

about 45 percent contributed more that $200.24 Although those taxpayers would have

had more after-tax income if they had itemized their deductions, their incentive to

contribute would have remained the same. In addition, contributions would have been

subject to recordkeeping requirements. It should also be noted that a small increase in

actual giving may be accompanied by a large increase in claimed contributions if taxpayers

believe that reporting the maximum allowable contribution is both routine and

unquestioned by the IRS.

Set a $250 Floor on Deductions. Allowing deductions only for contributions above a

floor amount would reduce the problems (noted above) caused by taxpayers reporting

small donations. A floor would result in less revenue loss than an unlimited deduction

would, while still providing many contributors with an incentive to give. A deduction

above a floor of $250 ($500 for joint filers) in 1997 would have reduced revenue by
22 EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS

25. Cordes, O’Hare, and Steuerle estimate that a deduction for contributions above $250 ($500 for joint

filers) would have increased contributions by $2.2 billion to $7.8 billion in 1995 while reducing tax

revenue by $3.8 billion to $5.0 billion. Unlike CBO’s analysis, their research did not impose a maximum deduction equal to the standard deduction.

	


Effects in 1997 of Allowing a Nonitemizer Deduction

for Contributions in Excess of $250 ($500 for Joint Filers)

Change in

Contributions

Sources of Revenue Loss Increased Increase

(Billions of dollars) Contribu- in Total

Itemizers tions ContribuIncreased Existing Switching Total (Billions tions

Elasticity Giving Giving Status Loss of dollars) (Percent)

0 0 3.6 0.8 4.4 0 0

-0.2 0.1 3.6 0.8 4.6 0.7 0.5

-0.6 0.4 3.6 0.8 4.8 2.0 1.7

-1.0 0.7 3.6 0.8 5.1 3.3 2.8

Source: Congressional Budget Office.

between $4.6 billion and $5.1 billion, CBO estimates (see Table 6). Revenue loss would

be substantially lower under this option than it would be under an unlimited deduction;

itemizers switching to the standard deduction would reduce revenue by only $0.8 billion,

and the deduction for existing contributions by nonitemizers would lower revenue by

$3.6 billion.

Because taxpayers who make small or no charitable contributions would have no tax incentive to give, this option would not increase contributions as much as an unlimited

deduction would. However, because small contributions account for only a minor part

of the lost revenue, the difference between the two options is relatively modest (a range

of $0.7 billion to $3.3 billion for the $250 floor option versus a range of $0.7 billion

to $3.5 billion for the unlimited deduction option). This option also would require fewer

taxpayers to keep records of contributions and would reduce the opportunity for dishonest taxpayers to claim small or nonexistent contributions.25

Set a Floor on Deductions of Two Percent of Adjusted Gross Income. Alternatively, the

incentive to contribute could be extended to lower-income taxpayers by defining the floor

as a percentage of AGI, such as 2 percent, instead of a fixed dollar amount. Taxpayers

not contributing would still not face an incentive to contribute small amounts, but very
EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS 23

26. Note that CBO’s estimates for 1997 are much more than one-tenth of JCT’s 10-year figure. The

discrepancy probably is due to differences in modeling and data sources.


 	

Effects in 1997 of Allowing a Nonitemizer Deduction

for Contributions in Excess of Two Percent of Adjusted

Gross Income

Change in

Contributions

Sources of Revenue Loss Increased Increase

(Billions of dollars) Contribu- in Total

Itemizers tions ContribuIncreased Existing Switching Total (Billions tions

Elasticity Giving Giving Status Loss of dollars) (Percent)

0 0 3.0 0.5 3.6 0 0

-0.2 0.1 3.0 0.5 3.7 0.6 0.5

-0.6 0.4 3.0 0.5 3.9 1.7 1.4

-1.0 0.6 3.0 0.5 4.2 2.9 2.4

Source: Congressional Budget Office.

low-income taxpayers would find it easier to reach the minimum necessary for the

incentive to start. For married taxpayers filing jointly with annual income of less than

$25,000, the floor would be lower than $500, whereas the floor would be relatively higher

for households with income above $25,000. According to JCT, the estimated cost for

a deduction with a floor equaling 2 percent of AGI (but not exceeding the standard

deduction) over the 2003-2012 period would be $19.3 billion. Had this deduction been

in effect in 1997, the cost would have been between $3.7 billion and $4.2 billion in that

year, CBO estimates (see Table 7).26 The revenue loss from taxpayers deducting existing

contributions and from itemizers changing to the standard deduction would be even

lower with a percentage floor than with a dollar floor; the deduction of existing contributions would reduce revenue by $3.0 billion, and itemizers switching their status would

lower revenue by $0.5 billion.

A percentage floor has several similarities to a dollar floor. As with a dollar floor, a percentage floor would encourage more contributions than a capped deduction would. In

1997, contributions under such an option would have grown by $0.6 billion to $2.9 billion, compared with less than $50 million for a ceiling of $100 ($200 for joint filers).

Also, like a dollar floor, a percentage floor would impose a recordkeeping burden on fewer
24 EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS

27. Congressional Budget Office, Budget Options (February 2001), p. 397.

taxpayers than an unlimited deduction would. Tax evasion might be less of an issue, too,

because a floor would eliminate small deductions, which are harder for the IRS to verify.

Additional Ways to Reduce Revenue Loss

Allowing taxpayers to deduct only contributions below a maximum or above a minimum

would reduce the loss in tax revenue without altering the standard deduction or itemized

deductions that they might claim. Revenue loss could be further reduced by changing

either of those kinds of deductions.

Lowering the standard deduction could be one way to mitigate revenue loss. For example,

if a maximum of $100 was deductible for nonitemizers, the standard deduction could

be reduced by $100. That change would keep the same incentives and same recognition

for existing charitable contributions, but it could eliminate the loss in revenue and

actually raise revenue if some people claimed less than the maximum deduction. On the

downside, nonitemizers who gave less than the cap would lose some of their current

deductions. Alternatively, the standard deduction could be reduced by the estimated

average level of contributions that a given option would induce.

The cost of lost revenue could also be reduced by extending limits on deductibility to

itemizers. For example, JCT has estimated that limiting the charitable deduction for

itemizers to giving in excess of 2 percent of AGI would raise more than $130 billion

between 2002 and 2011.27 That figure and figures from the previous section suggest that

a floor of 2 percent of AGI applied to the contributions of all taxpayers could potentially

raise revenue while extending the deduction to nonitemizers.
1. Department of Commerce, Bureau of the Census, “Questionnaire, Quarterly Interview Survey, Consumer Expenditure Surveys,” Form CE-302 (July 1, 1996), p. 122.

APPENDIX




Data and Methods

The Congressional Budget Office (CBO) used three separate data sets for the analysis

in this report. Data on charitable contributions by taxpayers who currently itemize

their deductions come from the 1997 Individual Statistics of Income (SOI). Data on

contributions in excess of $500 made by taxpayers claiming the standard deduction are

from the 1998 Survey of Consumer Finances (SCF). Contributions under $500 were

imputed to the SCF using data from the 1997 Consumer Expenditure Survey (CE).

Estimates of the number of itemizing taxpayers who would switch to the standard

deduction if a charitable deduction for nonitemizers was allowed used nondependent

returns from the 1997 SOI data. Taxes and tax rates were estimated both with and

without the applicable deduction for nonitemizers. If taxes were lower using the

standard deduction, CBO assumed that taxpayers would switch to that deduction;

otherwise, continued use of the itemized deduction was assumed. The calculations of

taxes did not include phase-outs of deductions and personal exemptions, the alternative minimum tax, or tax credits, such as the earned income tax credit.

CBO created nonitemizer returns using each respondent’s declared itemization status

from the 1998 SCF data. Information on contributions was limited to cash contributions in excess of $500 per year. Smaller contributions were imputed from the 1997

CE, and taxes were calculated using the National Bureau of Economic Research’s

TAXSIM program.

The 1997 CE consists of five quarterly interviews conducted throughout 1997 and the

first quarter of 1998. Total contributions were calculated as the sum of contributions

to religious organizations, educational institutions, and “charities, such as United

Way, Red Cross, etc.”1

 Itemization status was determined using TAXSIM. Contributions below $500 per year were imputed from the CE to the SCF by first dividing
26 EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS

both data sets into income quintiles, or fifths. For a given record in the SCF with contributions of less than $500, a record from the CE in the same income quintile with

contributions under $500 was randomly chosen with replacement, with the probability of selecting a given CE record proportional to the survey weight of that record.

Because each primary economic unit in the SCF was represented by five separate

records, in effect five imputations were performed for each unit in the SCF with annual contributions below $500. Taxes on the SCF with imputed contributions also

were calculated using TAXSIM.

Once contributions and tax revenue from each individual record were known, the loss

from a nonitemizer deduction was calculated. Increased contributions were estimated

by applying the assumed elasticities to existing contributions and applicable tax rates.

CBO estimated losses from existing contributions by using the minimum of contributions and the applicable ceiling. The percentage change in price was calculated as the

marginal tax rate on the last dollar of giving so that a taxpayer in the 15 percent

bracket who claimed the standard deduction would face a 15 percent decrease in his or

her tax price. Increased contributions from a deduction with a floor were calculated in

the same manner as the other options, except that the increase was mitigated by an

income effect. That income effect, which adjusted for the extra taxes that must be paid

because contributions are not fully deductible, was estimated as 2 percent of the additional taxes paid because of the floor.
APPENDIX



Unit Price Elasticity and

Revenue Loss

Readers familiar with the idea that a unit price elasticity implies that the increase in

contributions equals the loss in revenue (excluding the loss from itemizers who switch

to the standard deduction) may be confused by the final row of numbers in Table 3

(see page 17), in which the $3.5 billion increase in contributions is closer to the $3.8

billion revenue loss from a tax break for existing giving than to the loss from increased

giving and existing giving combined. The two numbers may be reconciled by recognizing that the standard elasticity proof only holds for infinitesimal changes in the tax

rate. For discrete changes, the standard proof requires that the percentage change in

taxes be calculated from the ending tax price, not the initial tax price.

That calculation may be shown as follows. First, assume that contributions C are not

deductible and are subject to a single tax rate t. Without deductibility, revenues from

this amount are then R = t × C, and the tax price of contributing an additional dollar

is 1. Assume now that contributions become deductible. Then the revenue loss is

dR = dt × C + t × dC (1)

where dt is the change in the applicable tax rate. For a taxpayer in the 15 percent tax

bracket, this change would be 0.15 - 0 = 0.15. To see that a unit price elasticity exists

when the revenue loss equals the increase in contributions, substitute dC for dR in

equation (1) and rearrange it so that

[(1 - t)/C]dC/dt = 1. (2)

Note that the tax price p is now (1 - t) and that dC/dt = -dC/dp so that

[p/C]dC/dp = -1, (3)
28 EFFECTS OF ALLOWING NONITEMIZERS TO DEDUCT CHARITABLE CONTRIBUTIONS

or the tax price elasticity is unity. Note that the implicit percentage change in price

dp/p is being calculated at the point (1 - t). For infinitesimal changes, such as when

t = 0.01, 1 and 1 - t are approximately the same number, and a unitary elasticity implies that increased contributions offset revenue loss. For discrete changes, the proof

no longer holds. For example, a taxpayer in the 15 percent bracket experiences a price

change from 1 to 0.85, or a percentage change of (1 - 0.85)/1, not (1 - 0.85)/0.85. For

the discrete change considered here, the appropriate elasticity measure is [1/C]dC/dp.

If revenue neutrality holds, the implied elasticity is therefore

[1/C]dC/dp = -1/p, (4)

or about -1.18 for a taxpayer in the 15 percent bracket. Thus, for such a taxpayer the

elasticity at which increased contributions equal the revenue loss (excluding switchers)

is actually -1.18, not -1. For a taxpayer in the 28 percent bracket, the necessary elasticity is about -1.39; for a taxpayer in the 32 percent bracket, it is -1.47.

It follows that if the price elasticity is unity when calculated at a price equal to 1, then

the revenue loss will exceed the increase in contributions. The difference between the

two may be found by setting the elasticity to unity

[1/C]dC/dp = -1 (5)

and then solving for C and substituting into (1)

dR = dC(1 + t). (6)

For a taxpayer in the 15 percent bracket with a unitary elasticity as calculated in equation (5), the revenue loss will exceed the increase in contributions by about 15 percent.