Order Code RL31108
Economic Analysis of the
Charitable Contribution Deduction
for Non-Itemizers
March 13, 2001
Jane G. Gravelle
Senior Specialist in Economic Policy
Government and Finance Division
*RL31108*
*RL31108*

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Economic Analysis of the Charitable Contribution
Deduction for Non-Itemizers
Summary
The Community Solutions Act of 2001 (H.R. 7), passed by the House, has eight
new tax provisions designed to benefit charities and charitable giving, the most
important one being the charitable deduction for non-itemizers. The tax provisions
would cost $13.3 billion over 10 years. When fully phased in, they cost $2.4 billion
on an annual basis. The non-itemizer’s deduction initially would account for about
one third of the cost of H.R.7, but by 2011, when fully phased in, it would account
for 50% of the total cost. This deduction, which is subject to a phased-in cap of
$100 ($200 for joint returns), was also in the President’s initial tax proposal, although
it was not capped. On February 8, S. 1924, providing a temporary deduction with a
$400/$800 cap and other provisions was introduced in the Senate. This paper focuses
on the economic effect of the deduction for non-itemizers, assessing the incentive
such deductions would create for increased charitable giving. It does not attempt to
estimate other types of societal impacts.
Economic analysis suggests that the impact of the proposed deduction on
charitable giving is likely to be relatively small, due primarily to the proposed
$100/$200 deduction cap on non-itemizer giving. For individuals and couples
already contributing more than the cap, there is no additional incentive for further
giving. Nonetheless, the deduction would still generate a significant government
revenue loss. Effects are also reduced by estimates that project a limited response by
taxpayers, particularly lower income taxpayers, to this kind of charitable giving
incentive. Analysis suggests that even when the deduction is fully phased in, a dollar
of revenue loss is likely to increase charitable giving by three cents, even under
relatively optimistic assumptions. The effect would be only half as large if one
netted out the percentage of contributions that go to provide sacramental services to
church members. The higher $400/$800 ceiling is estimated to increase giving by 12
cents for each dollar of revenue loss.
The capped charitable contribution deduction for non-itemizers will add
complexity to the tax system and to the simplified tax forms used by millions of
taxpayers, since an additional line would have to be added. Charitable deductions
are also particularly complicated for record keeping purposes because there is no
unified reporting system. Finally, because of the small amounts in question and the
absence of requirements for documentation for small gifts, tax evasion may increase;
there are likely to be deductions taken even when no contributions were made.
The caps on the deductions were measures to reduce the revenue cost of the
provision, but alternative approaches might encourage charitable giving while
limiting the revenue cost. For example, a partial deduction combined with a larger
cap might generale more charitable giving. An approach that would induce even
more giving might be a deduction with a floor, so that only contributions in excess
of a certain percentage of income would be allowed. While these options would be
more target effective, they would also increase the complexity of the provision.
Another alternative is to expand direct spending on charitable purposes. This report
will be updated to reflect legislative developments.

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Contents
Description of Current Law and Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Charitable Deduction for Non-Itemizers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
IRA Rollover Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Other Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Efficiency and Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Price Elasticity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Effect of the Caps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Target of Induced Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Estimates of Induced Giving Per Dollar of Revenue Loss . . . . . . . . . . . . . . 10
Effects of a Floor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Equity Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Simplicity, Compliance, and Tax Administration . . . . . . . . . . . . . . . . . . . . . . . . 13
Policy Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
List of Tables
Table 1: Caps on Charitable Contribution Deduction for
Non-Itemizers in H.R. 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 2: Use of Above the Line Deduction in 1986,
at 2001 Income Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table 3: Share of Revenue Cost Accruing to Taxpayers
Subject to Marginal Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Table 4: Recipients of Individual giving by Income Class,
2001 Income Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Table 5: Estimated Cents of Charitable Giving Per Dollar of Revenue Loss . . . 11

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Economic Analysis of the Charitable
Contribution Deduction for Non-Itemizers
The Community Solutions Act of 2001 (H.R. 7) has eight new tax provisions
designed to benefit charities and charitable giving. The bill also contains provisions
relating to charitable choice (directed at religious organizations’ role in
administering government programs).1 According to the Joint Committee on
Taxation, the charitable tax benefit provisions are projected to cost $13.3 billion over
10 years; when fully phased in they cost $2.4 billion on an annual basis. The
President proposed three of these tax provisions in his original tax proposal, but
these provisions were not included in the 2001 tax cut (P.L. 107-16). The current
administration proposal would provide an uncapped deduction and the other
provisions in H.R. 7. S. 1924, introduced in the Senate after discussion with the
President, also provides a series of similar tax benefits.
This paper summarizes the provisions affecting charitable contribution
deductions of individuals, and then analyzes the incentive such a deduction would
create for increased charitable giving. It does not attempt to estimate other types of
societal impacts. The non-itemizer’s charitable deduction was the single most
important tax provision, initially accounting for about one third of the cost, but by
2011 when fully phased in, would account for 50% of the total cost. This new
deduction was not capped in the President’s proposal and was much larger ($7.6
billion in 2011); it accounted for virtually all (94%) of the cost of charitable
provisions in that year. In S. 1924, the non-itemizer provision is temporary and has
a higher cap. The provision affecting rollovers from IRAs, which can also function
as a deduction for non-itemizers, is also discussed briefly.
The next section describes the proposed changes in the law. The following
sections discuss three basic issues: how effective and efficient the proposed non-
itemizer deduction might be in increasing charitable contributions, how equitable the
change is, and how the revision might affect tax complexity, administration, and
compliance.
1 For a discussion of charitable choice provisions, see U.S. Library of Congress,
Congressional Research Service, Charitable Choice Provisions of H.R. 7, by Vee Burke,
CRS Report RS20948 updated July 13, 2001.

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CRS-2
Description of Current Law and Changes
Charitable Deduction for Non-Itemizers
Under current law a taxpayer can either itemize deductions (with the major
deductions being charitable contributions, excess medical expenses, mortgage
interest, and state and local income and property taxes) or choose the standard
deduction. The latter is advantageous if that amount is larger than total itemized
deductions. H.R. 7 would allow someone who takes the standard deduction to
deduct charitable deductions in addition, but with caps as shown in Table 1. (The
deduction is taken from adjusted gross income, and thus would not affect that
measure.) S. 1924 would impose a cap of $400 ($800 for joint returns).
Table 1: Caps on Charitable Contribution Deduction for
Non-Itemizers in H.R. 7
Year
Cap For Single Returns
Cap for Joint Returns
2002-2003
$25
$50
2004-2006
$50
$100
2007-2009
$75
$150
2010 and after
$100
$200
A deduction for non-itemizers was formerly available in the tax law, enacted as
part of the Economic Recovery Tax Act of 1981 (P.L. 97-34). The deduction was
temporary for the years 1981-1986, and initially restricted to dollar ceilings and
partial deductions (e.g. deductions for 25% and then 50% of contributions).
However, 1986 was a year with no dollar limits and full deductions. The Tax
Reform Act of 1986 (P.L. 99-514) was a measure aimed at lowering rates and
broadening the tax base; since it made no provision for extending the charitable
deduction, that provision ended after 1986. However, data from 1986 provide a basis
for estimating some of the economic effects of the current proposal.
IRA Rollover Provision
The second largest provision in H.R. 7 is one allowing tax free distributions by
individuals aged 70 and1/2 and over from individual retirement accounts to
charitable organizations. While this treatment may appear no different from simply
including the amounts in adjusted gross income and then deducting them as itemized
deductions, it can provide several types of benefits even to those who itemize.
Apparently an important motivation is to reduce adjusted gross income which can
trigger a variety of phase-outs and phase-ins, including the phase-in of taxation of
Social Security benefits. (Another potentially important phase-out effect, that for

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CRS-3
itemized deductions, is now scheduled to be eliminated.) There are also some
income limits on charitable contributions.
However, unlike the case in the President’s proposal, this provision can also
benefit those who take the standard deduction by allowing exclusions that would not
be otherwise allowed. In effect, a return with the standard deduction would have no
cap on charitable deductions up to the limit of aggregate IRA amounts, since the
taxpayer could simply channel contributions through an IRA. (This effect did not
matter in the President’s proposal which had no cap).
This provision accounts for 29% of the revenue cost in the first full year, and
18% in the long run according to the Joint Committee on Taxation.
Other Provisions
The remaining provisions include an increase in the cap on corporate charitable
contributions (from 10% to 11% in 2002-2007, 12% in 2008, 13% in 2009 and 15%
in 2010); a change in the treatment of contributed property by firms, modifications
of excise taxes on net investment income, changes in the treatment of unrelated
business income, changes in the treatment of self constructed property, and
modification of basis for certain appreciated assets. The increase in the corporate
charitable deduction limit was also included in the President’s proposal; this
provision and the excise tax revisions are the largest in revenue terms of the
remaining provisions.2
Efficiency and Effectiveness
The first question that one might consider is whether the deduction for non-
itemizers is effective and efficient in achieving its goal. The charitable deduction
provision is combined with other legislative initiatives, including charitable choice
provisions that are designed to liberalize rules governing the administration of public
funds by religious organizations. The stated purpose of the tax revision is to
encourage giving to charitable organizations: “to provide funds to charitable
organizations, many of which will perform activities that otherwise would have to
be performed by the Federal Government.”3
Economic theory also recognizes an efficiency rationale for subsidies to
charitable giving. When individuals give to charity, they do not take into account the
benefits their contribution provides to others and therefore charitable giving is under
supplied in a market economy. Indeed, other potential donors in society can receive
the benefits from the charitable activities of others without contributing. This free-
rider problem is, in fact, one of the justifications for government activities that use
mandated contributions (taxes) to provide a variety of services. Some activities (such
2 See Joint Tax Committee, Description of an Amendment in the Nature of a Substitute to
H.R. 7, the “Community Solutions Act of 2001,” JCX-58-01, July 10, 2001.
3 Ibid.

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CRS-4
as national defense) would probably be impossible to provide privately. Most of the
support of the poor is also undertaken by government. Other activities that may have
broad benefits to society (e.g. research and development, art, education) are provided
both publicly and privately.
There are advantages and disadvantages in using direct funding versus
encouraging private charitable donations. For example, government provision may
more generally reflect the collective preferences of society, but private provision may
provide added diversity.
The under supply of charitable activities is greater in some circumstances than
in others. One important factor is the size of the contributing group. In general, the
larger the pool of contributors or potential contributors, the greater the free-rider
problem. It is also more difficult to obtain a better market outcome if the benefits of
the activity are not excludable. For example, contributions that finance health
research benefit all members of society; for that reason government is heavily
involved in providing funds for such research and in providing a legal framework
(e.g. patent laws) that encourage the profit-making sector to invest. Art museums,
however, have the option of charging admission to finance their services so that these
institutions would still exist (perhaps in smaller numbers) in the absence of both
charitable donations and government support.
Another of the problems with stimulating charitable activities through private
giving is that it is not always easy to separate pure charitable giving and giving in
which the donor receives a direct benefit. A contributor to the opera, for example,
who receives a seating preference, is receiving a benefit. Contributors to institutions
of higher education may find it more likely that their children are admitted to
prestigious schools. And, one of the more obvious examples of small groups that
receive benefits are contributions to churches, where contributions are partly used to
provide services to members. This provision of sacramental and similar services is
particularly important in evaluating the deduction for non-itemizers because of the
very large fraction of contributions that go to religious organizations.
There is also some leakage in the tax system in that individuals will claim
deductions for expenditures they did not incur. This problem may be particularly
likely to arise with small cash donations since there is no requirement that small
donations be substantiated and it is not efficient for the tax authorities to make efforts
to enforce compliance associated with small dollar amounts.
Another issue is whether a dollar spent stimulating private giving will result in
contributions (regardless of their use) that are greater than a dollar or smaller than a
dollar. If the induced contribution is larger, private charitable tax incentives are more
efficient than direct spending, assuming the objectives of private and public spending
are equally desirable. The stimulative effect of a tax subsidy is measured by the price
elasticity. As a rule of thumb, without considering other factors (such as the whether
the contributions actually go to a charitable purpose and the effects of caps), a dollar
of revenue cost will result in more than a dollar of giving if the price elasticity is
above one in absolute value. (All further references to price elasticities will refer to
absolute values, without negative signs.)

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CRS-5
Finally, an important issue with a capped deduction is what portion of the
revenue loss is associated with individuals whose deductions, in the absence of the
subsidy, are less than the cap. If individuals are already giving more than the cap,
there is no economic incentive for further giving, since further giving will not affect
tax liability. However, the government still incurs a revenue loss.
Therefore, the amount of induced giving per dollar of revenue cost for the non-
itemizer capped deduction is the product of three factors: the absolute value of the
price elasticity, the share of the cost going to individuals not subject to the cap, and
the share of the induced contributions going to desired charitable activities. The
following subsections explore each of these in turn.
The Price Elasticity
Research on the price elasticity of charitable contributions had long suggested
that, other things equal, charitable contributions deductions might be efficient since
elasticities averaged above one. However, these studies were criticized because they
did not control for transitory timing effects. High income individuals would choose
to make contributions when their tax rates and income were temporarily high, but this
effect would not be a permanent response. Estimates correcting for this effect found
elasticities below one. A recent study of the effect of fundamental tax reform used,
as a base case, an elasticity of 0.5, corrected for timing effects, but also considered
the older elasticity of 1.3 reflecting general findings of earlier studies.4
A recent study (Duquette, 1999) of non-itemizer contributions also suggests that
elasticities will be below one in absolute value.5 This study examined the non-
itemizer deductions allowed in 1985 and 1986 (when ceilings were not present), and
also estimated price elasticities for itemizers. Note that this study could not correct
for transitory effects, including the temporary nature of the deduction for non-
itemizers which would have encouraged individuals to shift deductions, especially
to 1986, particularly those at higher income levels. This study found elasticities, for
1985 and 1986, of 1 and 1.24 for itemizers, but elasticities of 0.8 and 0.6 for non-
itemizers. (Note that the estimate for non-itemizers in 1985, while statistically
significant, was not measured very precisely; the estimate for 1986, while measured
somewhat more precisely, may be overstated because individuals would have an
incentive to concentrate their contributions in that year.)
These findings of lower elasticities for non-itemizers are also consistent with
evidence that suggests that price elasticities are not constant across income levels, but
4 See Charles Clotfelter and Richard L. Schmalbeck, “The Impact of Fundamental Tax
Reform on Nonprofit Organizations,” in Economic Effects of Fundamental Tax Reform, ed.
Henry J. Aaron and William G. Gale, Washington, D.C., The Brookings Institute, 1996 for
a general discussion. The study correcting for transitory effects is Randolph, William C.,
“Dynamic Income, progressive Taxes, and the Timing of Charitable Contributions,” Journal
of Political Economy. Vol. 103 (August 1995), pp. 709-38.
5Christopher M. Duquette. “Is Charitable Giving by Non-Itemizers Responsive to Tax
Incentives? New Evidence.” National Tax Journal Vol. 52, No. 2, June 1989, pp. 195-206.

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CRS-6
are lower at lower levels. Examining itemized returns that do not suffer as much
from transitory effects, Duquette finds price elasticities for the $1 to $40,000 income
class to be 0.08 in 1985 and 0.25 in 1986, with neither estimate statistically different
from zero. Elasticities rise as income increases (although some of that increase may
reflect the greater importance of transitory effects at higher income levels).
As shown in Table 2, where the 1986 data are reported by income class (but
restated in 2001 income levels) non-itemizer deductions are concentrated in lower
income levels, simply because it is in the lower income levels that the standard
deduction is normally taken. Based on Duquette’s elasticities by income level, an
average elasticity weighted by the number of contributors in each class suggests an
elasticity of 0.10 based on 1985 data and 0.29 based on 1986 data. (These estimates
are, however, highly imprecise.) The effects of caps, which tend to concentrate the
marginal benefit even more among lower income levels, would slightly decrease
these estimates.
On the whole, therefore, the evidence suggests price elasticities that are
considerably lower than one, and perhaps not very different from zero. In the
analysis below, we use the estimate of 0.5, which reflects a typical level from the
literature corrected for transitory effects, is somewhat below Duquette’s direct
estimates (which do not correct for transitory effects) and somewhat above the
income weighted estimates. We also discuss the effects of alternative choices.

Effect of the Caps
A second issue is the effect of the caps. In order to estimate this effect, we
combine the data in Table 2, which reports on average contributions by income class
with survey data that provides a distribution of non-itemizer contributors by size of
contribution.6 This survey data indicated that 29.3% of non-itemizing households
contributed less than $100 and 44.6% contributed less than $200.
Although these numbers suggest a substantial fraction of non-itemizers might
affected by the cap, these numbers are much too large to provide a guide to the
projected efficiency of H.R. 7. Indeed, we estimate that the share of tax cuts accruing
to those under the cap is only 3% initially and only 6% when the provision is fully
phased in.

A more detailed explanation of the corrections that should be made in these data
is provided in the Appendix. However, some simple approximations will explain
why this share is relatively small. To begin with, we need to estimate an aggregate
that reflects the shares of joint versus single returns; since only 20% of non-itemizer
returns are joint, a number of about 32% is appropriate. (Our actual estimates are
slightly different because shares are adjusted by income class.)
But out of the class with contributions below the ceiling, the average deduction
will also be below the ceiling, while for those above the ceiling the average deduction
will also be the ceiling amount. If, say, the average were only half the cap, the
6 Compiled by Independent Sector, 1999.

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CRS-7
percentage of deductions below the ceiling would fall to 19% (0.32 X 0.5)/(0.32X0.5
+0.68). However, this number is also too large because the data indicate the
cumulative share of the population under a ceiling do not rise proportionally with
ceiling increases; that is, the function is not a linear one. For that reason, the average
contribution in the bottom class tends to be less than half the ceiling: a functional
form that fits the data quite well suggests that the average will be about 32% of the
ceiling. This correction would lead to about 13% of the cost associated with the
group under the ceiling (0.32 X 0.32)/(0.32X0.32 +0.68).
Table 2: Use of Above the Line Deduction in 1986,
at 2001 Income Levels
Income Class
Share of
Averag
Non-
% of
% of
% of
Total
e
Itemizers
Returns
Tax-
Tax-
Returns
Amount
with
With
payers
payers
(%)
Claime
Contri-
Above
with no
Who
d by
bution
the Line
Above
Itemize
Non-
As a %
Deduc-
the Line
Itemi-
of all
tion
Deduc-
zers
Non
tion
Itemizers
Under $12,000
16
$412
17
16
79
5
$12,000-24,000
16
808
42
38
52
10
$24,000-$36,000
13
1001
55
45
37
18
$36,000-$48,000
11
1241
60
43
29
29
$48,000-$60,000
9
1322
64
36
20
43
$60,000-$72,000
7
1692
66
27
14
59
$72,000-$96,000
11
1699
72
18
7
75
$96,000-$120,000
7
2230
77
10
3
88
$120,000-
6
3365
78
5
1.3
94
$180,000
$180,000 -
1.5
6140
86
3
0.6
97
$240,000
$240,000 and
1.5
8212
59
1
0.8
98
over
Source: CRS calculations based on data from Internal Revenue Service Statistics of Income,
Individual Income Tax Returns 1986. Dollar amounts are restated in 2001 income levels.
The tax revenue shares will be further lowered because small contributors are
concentrated in low tax rate brackets. Calculations in the appendix suggest that the

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CRS-8
average tax rate in this class is only 70% of the average across all taxpayers, causing
the share to fall to 9.5% of the total ( (0.32 X 0.32X0.7)/(0.32X0.32X0.7+0.68).
Two other factors tend to lower the share, although they interact with the
correction described above in ways that cause only a small additional reduction.
First, the survey data cover the entire population while tax benefits go only to the
taxpaying population. About 20% of returns have no tax liability before credits.
Since low levels of donations are associated with lower levels of income, the share
of the taxpaying population with small donations should be considerably smaller than
the share of the total population. Adjustments for these effects suggest that about
24% of the taxpaying population would fall below the caps.
Finally the caps are phased in and begin at $25/$50 rather than $100/$200.
Moreover, even as caps increase in nominal value, they are also declining in value
relative to income, so the shares will fall below 10%. An adjustment is also made
for these effects, which vary by year, but even in the year that benefits are fully
phased in, the caps are cut approximately in half. (Further details of the methodology
used to make these adjustments are provided in Appendix A.)
Table 3 presents the estimated share of revenue loss that falls under the cap as
a result of these calculations. After 2011 the share would continue to decline as
nominal values fall relative to incomes.
Table 3: Share of Revenue Cost Accruing to Taxpayers
Subject to Marginal Effects

Year
Nominal Dollar Ceiling:
Estimated Share (%)
(Single/Joint)
2002
$25/50
2.8
2003
25/50
2.7
2004
50/100
4.7
2005
50/100
4.6
2006
50/100
4.4
2007
75/150
5.7
2008
75/150
5.5
2009
75/150
5.3
2010
100/200
6.3
2011
100/200
6.0
See Appendix A for the methodology used to derive the share

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CRS-9
For the $400/$800 ceiling, the share of revenue going to individuals with a
marginal incentive would be higher, but is still at 24%.
Target of Induced Contributions
A final issue that would affect the target effectiveness of the non-itemizers
deduction is what types of contributions are induced. This issue is particularly
important because of the amount of giving to religious organizations. To the extent
that those contributions provide for member benefits, they may be less likely to
efficiently address the market failures in charitable contributions identified by
economic theory or the objectives stated directly in the legislation (to provide for
private provision of services that might otherwise be provided by the government).
The most important recipient of all charitable giving is religion, which
accounted for 36.5% of the total $203.45 billion of giving in 2000.7 It is almost three
times as large as the next largest recipient area (education) which accounts for 13.8%.
The remaining categories (health, human services, arts, culture, public/society,
environment and international affairs) account for less than 10% each. Religious
giving accounts for an even larger share, 43.4%, of giving, excluding foundations.
(Foundations account for 12% of giving, individuals for 75%, bequests for 7.8% and
corporate giving for 5.3%.) However, giving to religious organizations is even more
pronounced among individuals at lower and moderate incomes, as shown in Table
4, which reproduces data from 1992, restated at 2001 levels of income.
When the shares in Table 4 are matched with the data in Table 2, the results
indicate that 73% of contributions for non-itemizers in general, and 74% for non-
itemizers who fall below the cap, are made to religious organizations.
Of course, religious organizations engage in activities that provide benefits
beyond the local congregation and even outside of strictly religious functions. A
study of the disposition of these funds, however, indicated that about 70% of the
receipts of religious organizations go to provide sacramental services and similar
services for members.8 Thus, assuming that those under the caps have similar
characteristics in the choice of giving to those over the caps, one could make a case
for excluding 52% of induced contributions (0.7 times 0.74) in measuring the
efficiency of the charitable deduction provision.
7 Giving USA 2001. American Association of Fund Raising Counsel.
8 See Jeff E. Biddle, "Religious Organizations" In Who Benefits from the Nonprofit Sector,
edited by Charles T. Clotfelter, Chicago, University of Chicago Press, 1992. According to the
article, 70% of these transfers go to provide for sacramental services and similar services for the
members.

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Table 4: Recipients of Individual giving by Income Class,
2001 Incom e Levels
Income Class
Share to Religion
Share to Higher
Share to Other
Education
$8,000-16,000
72.4
1.4
26.2
$16,000-24,000
76.2
0.8
23.0
$24,000-$33,000
76.4
0.7
22.9
$33,000-$41,000
75.6
0.7
23.7
$41,000-$50,000
74.3
0.8
24.9
$50,000-$66,000
72.1
0.9
27.0
$66,000-$83,000
68.5
1.1
30.3
$83,000-
62.4
1.5
36.1
$124,000
$124,000-
52.7
2.3
45.1
$165,000
$165,000 -
37.8
4.0
58.2
$330,000
$330,000-
15.2
11.2
73.6
823,000
$823,000-
6.3
23.1
70.8
1,000,000
$1,651,000 and
6.1
20.5
73.3
over
Source: Charles Clotfelter and Richard L. Schmalbeck, “The Impact of Fundamental Tax
Reform on Nonprofit Organizations,” In Economic Effects of Fundamental Tax Reform, ed.
Henry J. Aaron and William G. Gale (Washington, D.C., The Brookings Institute, 1996).
Estimates of Induced Giving Per Dollar of Revenue Loss
In this section we combine the three estimating parameters to estimate the
induced giving in cents per dollar of revenue cost. These estimates are provided in
Table 5, and they indicate that initially, excluding religious member services, each
dollar of revenue lost will result in one cent of induced contributions. This amount

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CRS-11
will gradually rise to two cents before beginning to fall. If all giving is included, the
induced amount begins at slightly over two cents, gradually rising to almost four
cents.

Table 5: Estimated Cents of Charitable Giving Per Dollar of
Revenue Loss

Year
Excluding Expenditures
Including Expenditures
on Religious Member
on Religious Member
Services
Services
2002
0.7
1.4
2003
0.6
1.3
2004
1.1
2.4
2005
1.1
2.3
2006
1.0
2.2
2007
1.7
2.9
2008
1.4
2.8
2009
1.3
2.7
2010
1.5
3.1
2011
1.5
3.0
Source: CRS calculations. The third column is 0.5 (the price elasticity) times the share in
the third column of Table 3. The second column is 0.48 times column three.
The estimated effects of the $400/$800 caps in S. 1924 would be somewhat
larger, 12 cents per dollar of revenue (0.5 X 0.24), with half that amount going to
religious services, for an induced giving outside of religious services of 6 cents per
dollar of revenue loss.
By any of the measures, very little induced giving occurs as a result of the
capped itemizer deduction in H.R. 7 or even in S.1924. The most important limiting
factor is the cap on deductions which causes most of the revenue loss to accrue as a
benefit (or windfall) to individuals who are already giving in excess of the cap.
However, the effectiveness is also limited by the relatively low price elasticity (which
alone would cause only 50 cents of induced giving per dollar of revenue loss, even
without the caps or exclusion of religious member services). A deduction with no
caps would result in only 24 cents of induced giving out side of religious member
services. Thus, all three factors act to limit the effectiveness of the deduction for
non-itemizers.

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CRS-12
These numbers are, of course, sensitive to the estimates of the share affected and
the estimates of price elasticity and exclusion of member religious services.
Evidence suggests, however, that the price elasticity, if anything, is probably smaller.
Using Duquette’s elasticity estimate weighted by income would result in a weighted
elasticity of 0.29 without the caps and 0.26 with the caps, even using the higher 1986
estimates. With the lower 1985 estimates, the elasticity would be 0.12 without a cap
and 0.10 with a cap. Estimating the share attributable to caps is also subject to a
number of potential uncertainties because of limitations of the data.
It is possible that small contributors are less likely to be making regular
contributions to churches and the estimates in column two may be somewhat
understated. At the same time the estimates do not take into the account the
possibility that a lot of small deductions may simply be claimed without making a
contribution, given the fact that such small deductions are likely to be unchallenged
by the tax authorities.
Note that the provision allowing IRA rollovers will have a greater impact per
dollar of cost than the deduction for non-itemizers, because the effective caps are
likely to be larger.
Effects of a Floor
A capped deduction is less costly than an uncapped deduction but also less
efficient. It is possible to increase the efficiency level by use of a floor.9 As the
Appendix shows, this same data can be used to estimate a floor; in the case of a $500
($1000 for joint returns) floor, we estimate that each dollar of revenue loss will
induce 64 cents of giving (and 32 cents if religious services were excluded). The
floor increases the power of the effect (which would otherwise be 50 cents total on
the dollar with a deduction with neither cap nor floor), and an important constraint
is the elasticity. A floor, however, tends to shift the distributional effect to higher
income individuals compared to a ceiling.
One approach that is likely to be even more efficient and which does not shift
the distribution as much is to have a floor as a percentage of income. It is more
efficient because the floor can be moved up to reflect the higher giving levels of
higher income individuals. While our data do not permit the full projection of large
floors (and thus effects can be calculated only at lower incomes, initial results
suggest that this approach would be considerably more effective per dollar of
revenue. For the $12,000 to $24,000 income class, a floor that was 2% of income was
estimated to induce 81 cents of contributions per dollar. In the $24,000 to $36,000
class, each dollar of loss is estimated to induce $1.04 of contributions. In the
$33,000 to $48,000 income level, each dollar of loss is estimated to induce $1.31 of
contributions. These effects would, of course, vary with the percentage of income,
falling as the percentage falls and rising as it rises, and about half would go to
religious services.
9 The effect of a floor is also estimated in “Extending the Charitable Deduction to
Nonitemizers: Policy Issues and Options,” by Joseph Cordes, John O’Hare, and Eugene
Steuerle, In Charting Civil Society, No. &, May 2000, the Urban Institute.

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CRS-13
Equity Issues
Equity issues are probably not the principal issues associated with a charitable
deduction for non-itemizers. The tax cut benefits individuals in the lower and
moderate income classes relative to many types of tax cuts, but the same effects
could be accomplished with an increase in the standard deduction.
It may be argued that individuals should be able to deduct charitable
contributions separately because they do not benefit from them. However, economic
theory does not provide a particular justification for deducting charitable transfers on
equity grounds since individuals freely make such contributions and derive some
benefit from them (even if the benefit is only a good feeling). Moreover, individuals
who take the standard deduction generally elect to take it because it is larger than
their itemized deductions, including charitable contributions.
Another claim that might be made is that charitable giving directly benefits the
poor as recipients of funds. Of course, as indicated above, very little of the revenue
loss translates into additional giving with caps. In any case, only a small fraction of
money that goes to charity is focused on poor people. For example, only about 6%
of giving to religious organizations is estimated to go to benefit poor individuals.
And while the share benefitting the poor is somewhat higher in some other
categories, we estimate that no more than 10% of all charitable giving directly
benefits the poor.10 Moreover, very little of this amount is in the form of cash
transfers.
Simplicity, Compliance, and Tax Administration
A charitable deduction for non-itemizers adds complexity to the tax system.
Indeed, one of the standard deduction’s major purposes has been to reduce the
complications of tax filing by allowing a fixed sum for most individuals as a
substitute for itemized deductions. Allowing an additional deduction for charitable
contributions would add an additional complication, in particular since charitable
deductions may occur in small amounts and require more record-keeping than many
other kinds of deductions. Most itemized deductions (taxes, mortgage interest) are
reported directly to taxpayers, but records of small charitable contributions must be
kept by taxpayers themselves. Individuals who wish to claim the deduction would
have to use more complicated forms and all individuals using those forms would
have an additional line to read. An additional deduction also makes it more difficult
to consider moving some day to a simplified, return-free income tax filing system.
In addition, because of the small sums involved with a cap and the lack of a
requirement for record-keeping for these small sums, the allowance of an deduction
for charitable contributions may induce more than average amounts of tax evasion.
10 These estimates are based on the articles in Who Benefits from the Nonprofit Sector,
edited by Charles T. Clotfelter (Chicago: University of Chicago Press, 1992). Further
details are available from the author.

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CRS-14
Many individuals will probably figure they can safely report a small amount of
fictitious contributions without any consequences, although there were many
individuals who made no contributions at all when the non-itemizers deduction was
allowed in the early 1980s.
Policy Options
The most important revision that might be considered in the non-itemizer
deduction is to eliminate the caps. Of course, one of the constraints on tax cuts is the
shortage of revenue. However, it would be possible to modify the deduction to make
more of the contributions subject to marginal effects even while limiting the revenue
cost. One approach would be to raise or even eliminate the ceilings and provide only
a partial deduction. Partial deductions were allowed during the 1981-1985 period.
An approach that would have an even more pronounced effect on targeting the
marginal contribution would be to institute a floor, rather than a ceiling, as is the case
for medical deductions. A flat dollar floor would simplify administration and reduce
false claims of deductions. A floor based on income would be most effective,
although more complicated to compute. A floor might also direct even more of the
benefits to religious activities that provide direct services to the contributors.

The third option is to use the revenue that would have been directed at the tax
cut to fund spending programs aimed at the same objective, either through a direct
government program or a grant that might be administered by a private entity.

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CRS-15
Appendix A
To estimate the share of dollars going to individuals who will have a marginal
incentive requires the combining of two sets of data: the 1986 data on the number of
returns that claimed the non-itemized deductions for charitable contributions, and
recent data by the Independent Sector showing that 29.3% of individuals made
contributions that amounted to less than $100 and 44.6% of individuals made
contributions that amounted to less than $200. These data are not distributed by
income.
We cannot directly use these latter numbers for several reasons. First, these
survey data on distribution of contributions by size of contribution cover individuals
who would have no tax liability, and thus would not have a benefit from the
deduction. Since there is a correlation between small contribution size, small income
and lack of tax liability, the percentage would be smaller. Secondly, the dollar limits
depend on filing status (joint or single) so that the numbers must be weighted to
reflect ceilings averaged over filing status.
To allocate these amounts over incomes, we used the average contribution in
each income class from Table 1 as a guide to the differential share of individuals in
each class below the cap, by measuring the share that would have fallen below the
contribution limit based on a uniform distribution of contributions. This approach
produces a total number that is too small (because there are likely to be some
individuals in each class with very large contributions that affect the average in a way
that a uniform distribution would not). The formula for this ratio is the dollar cap
divided by twice the average contribution. This method produces shares that begin
at 24% in the lowest class and decline to 12% in the next bracket, 10% in the next
and so forth, with an average of 10.4% for all of the income classes.
The $200 and $100 amounts were computed separately and then weighted. In
the case of the $200 amount, we begin with an overall average of 44.6%. However,
some of that amount reflects individuals who might have not claimed a deduction
because of lack of tax liability. We made an adjustment only in the lowest bracket
by assuming that the differential between the share claiming the deduction in that
bracket and the next bracket was part of the reported share. This amount of 6.3 %
reduces the overall average for taxable returns under $200 to 38.3%. A similar
procedure reduces the share for the $100 and over contribution class to 23.0%. This
adjustment is imperfect, since it assumes all of that amount is due to contributors
(overstating the adjustment) but makes no adjustment for the next bracket, where
some returns might not be taxable as well (understating the adjustment).
To obtain the totals, each ratio was multiplied by the share derived from the
uniform distribution calculation, so that for the $200 category the share in the lowest
class was 90% (38.3/10.4 times 0.24), the next class was 46% and so forth. A similar
procedure was calculated for the $100 class. In calculating the totals, however, an
exclusion of returns expected to have no tax liability under current tax law was made.
For the joint return ($200) number, the first bracket was excluded entirely. For the
single or head of household return ($100) number, two thirds of the first bracket was
excluded based on the exempt levels of singles and heads of household, and the share

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CRS-16
of returns that are heads of household in that category. The resulting effect of
excluding this total was to reduce the under $200 share from 38.3% to 36.9% and the
under $100 share from 23% to 22.5%.
Each income class was then weighted according to the share of joint returns
filed in that class (based on 1997 data inflated to 2001 income levels). This
procedure yielded a total of 24.1% of returns with contributions under the cap.
This 24.1% number is, however, too large to use in estimating contributions
induced per dollar of revenue loss. First, those over the cap have a full $200/100
deduction, while those under the cap have only a partial deductions. Thus, it is
necessary to estimate the average size of contributions for those below the cap.
Secondly, the returns above the cap will have higher marginal tax rates than those
under the cap, because the share under the cap falls as income rises. To correct for
this effect, we weighted the tax rates for the cap and the tax rates for all returns, and
found those with a cap had tax rates approximately 70% of those over the cap.
Finally, the caps begin at a smaller level and are phased in nominal terms. In 2002
and 2003, the ceiling is only a quarter of the size of the long run amounts: $25 and
$50, rather than $100 and $200. And, the dollar amounts do not rise with income;
even the data on the shares with $200 and $100 ceilings from 1999 must be corrected
for growth over that time. That is, to maintain the shares of individuals under the
caps, the $100 and $200 amounts must have been increased with income growth.
Adjusting by growth rates that have already occurred in output and by the projections
of the Congressional Budget Office, a $100 deduction in 1999 must have growth by
76% to maintain its relative value in 2010, which is the same as saying, for purposes
of applying the data from 1999, that the 2010 deduction is only 54% of its value in
1999.
In adjusting the shares for these lower real amounts, however, another problem
is projecting from the data (44.6% giving less than $200 and 29.3% giving less than
$100). This function is not linear; that is, if we want to examine the effect of a
deduction 25% as big, we cannot simply use a share a quarter as large.
The data suggest some sort of exponential function relating cumulative shares
of the population to dollar amounts. We considered two functional forms. The first
is a function derived from an exponential probability distribution of the form:
(1) S = 1-exp(-xp),
where S is the cumulative share of the population falling below the dollar value of
x, with x ranging from zero to infinity.
The second functional form was:
(2) S = Axp
To project these relationships, we used all of the observations of shares up to
$1000, assumed an exponential function and fitted the curve. Both curves performed
well statistically; however, the first functional form did not match shares very well
at the lower end of the distribution. The second function matched these shares very

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CRS-17
closely, but had the disadvantage that probabilities do not sum to one. We chose the
function that fit most closely at the low end of the scale, and which yielded an
exponential curve with a power of 0.4476.11 In general, a limit 25% as large would
lead to a share 52% as large (0.25.4476). It would also indicate that the average
contribution within a cumulative interval is p/(1+p) times the ceiling of that
cumulative interval. (This amount is obtained by integrating the density function
pAx(p-1) times x, and then dividing by the cumulative probability). This ratio
amounts to about 32% (0.4476/(1+0.4476), indicating that the average contribution
in the group of contributors that gave less than $100 is $32. This amount is less than
the average of $50 that would occur with a linear relations. Thus the functional form
causes a larger share of individuals to remain under the cap compared to a linear
form, but a lower average contribution for those individuals.
The results will differ somewhat, however, depending on what assumptions are
made about where the contributors below the limit that have no tax liability fall
relative to the contributors below the limit. If these two groups are scattered
randomly across the entire population share subject to the caps one can just multiply
the population ratios by the original share (of 24.1%) and the constant share by the
new dollar ceiling.
This assumption is not entirely reasonable, and an alternative one is that
nontaxable contributors take up the very bottom of the distribution and taxable
contributors are stacked on top of these individuals. This approach understates
somewhat the share of the taxpaying population that is covered, especially in the
early years, but overstates the average contribution within that population. In this
case, the ratio of individuals included would be multiplied by the share of all
individuals (which we calculate at about 35% based on the ratios of joint and single
returns) and then subtract the amounts associated with the non-taxable share (which
we estimate at about 10.9%). The taxable population share goes down by much more
than in the approach used above. However, the average contribution using this
approach is much higher: (p/(1+p)X (1+ .109/(new taxable population share)) and
also multiplied by the difference between the new ceiling and the ceiling associated
with the distribution running up to 10.9%, divided by the new ceilings).
Based on these relationships we predict the shares of individual revenues that
would be covered under the cap as shown in Table 3. The formula for dollars spent
affecting taxpayers at the margin is( rX 0.7/ (r*0.7*s +(1-s))), where r is the ratio of
the average contribution to the ceiling, and s is the share of the taxable population
falling under the cap.
For the $400/$800 cap in S. 1924, the share is estimated at 24%. Data presented
that report for 1999 indicated that a significant fraction of contributions were made
by individuals contributing less than $800 and $400, 81.3% and 65.4%. As noted
above, these numbers are much too high because they must be adjusted for the
11 For the first seven increments of $100, the shares are 0.293, 0.153, 0.122, 0.086, 0.066,
0.049, and 0.025. The next $300, from $700 to $1000, account for 0.057. Despite the small
number of observations, the constant term and exponent were statistically significant and
precisely estimated.

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CRS-18
distribution across taxable returns, and weighted for the share of returns filed by
single individuals, who tend to be more important at the lower income levels. These
adjustments led to an estimate that about 56.6% of individuals would have
contributions under these amounts. When adjusted for the lower value of deductions
granted in 2002 compared with 1999 income levels, this adjustment resulted in a
share of 50.4%. That is, 50.4% of the individuals who make contributions are likely
to fall under the ceiling and thus are likely to have a marginal inducement to
contribute. We estimate that the average amount given would be approximately 39%
of the cap, while the share of those above the cap would be the cap it self. This factor
would cause the share to be 28%. In addition, the tax rate of individuals under the
cap will be lower than the rate of those over the cap, and we estimate the ratio of tax
rates to be about 70%. This effect would cause the share of revenue to fall to 23.8%.
That is, only about 24% of the revenue cost would accrue to individuals where an
incentive to give would still exist.
To estimate induced giving, we used an elasticity of 0.5, which resulted in an
additional giving of 12 cents (0.5 X 23.8) per dollar of revenue loss. These estimates
are, if anything, likely to be a little high. Since about 70% of giving by non-itemizers
is to religious organizations and about 70% of that amount is for sacramental services
and similar services for members, about half, or 6 cents per dollar, would go to these
member services.

In the analysis of the effects of a floor, the analysis uses the estimates of the
number of individuals who fall below the floor and their average deduction, along
with overall average deductions to determine the average deduction for those above
the floor. That is:
AD = sAD + (1-s) AD
b
a
where AD refers to average deduction, s is the share of individuals giving below the
floor, AD is the average deduction for individuals below the floor and AD is the
b
a
average deduction for those above the floor. We consider the case of a floor of $500
for a single return and $1000 for a joint return.
With these floors, each dollar of revenue loss is estimated to lead to about 64
cents of induced contributions, with about half of that amount going to provide
sacramental or other religious services. According the data referred to above, a
significant fraction of contributions were made by individuals contributing less than
$1000 and $500, 85.1% and 72.0%. Again, these raw numbers are too high because
they must be adjusted for the distribution across taxable returns and weighted across
taxpayers, resulting in a share of 61.9%. After adjusting for income levels, the share
is estimated at 56.2%. That is, 56.2% of the individuals who make contributions are
likely to fall under the floor.
For these individuals, we estimate that the average amount given would be
approximately 39% of the floor. Using the formula above, and weighting across
returns and filing status, we estimate that the average individual contributing over the
floor amount would contribute 4.575 times the floor. The floor makes the
contribution an estimated 1.28 times as effective for these individuals as a deduction
allowed without a floor (4.575/(4.575-1)). This amount must be multiplied in turn

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CRS-19
by the price elasticity, which is estimated at 0.5, to yield an induced contribution per
dollar of 64 cents (0.5 X 1.28). As with other estimates, about half of this amount
would go to fund religious services and the remaining half would go to other
purposes.
For a moving floor, the shares are estimated for each floor in each income class,
the get data on shares and giving ratios. Unfortunately, not all of these effects can
be estimated with the data available, since these data do not extend above $1000.
Thus, it is impossible to extrapolate above that level.

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