GOOD TO KNO W

Tax benefits for charitable giving are linked with current giving—the higher the available deduction, the more likely a donor will give a larger amount. When donors can anticipate a change in tax rates, they will time their gifts to maximize their tax deduction. Thus, if the amount that can be deducted declines, donors will “pre-give.” Over time, the giving rate and amount will return to prior levels, but it could take at least a few years for donors to adjust.

The tax benefit of charitable giving is also a topic that parents may use to teach their children about giving, which may increase the probability that young people will practice philanthropy when they have their own incomes.

 

and early 20s responded with financial donations (with money they earned by participating in the experiment) when given the opportunity to develop a personal or emotional connection to the cause, either by getting to know someone, even just a little, or by being asked to volunteer before being asked for money. Drs. Liu and Aaker tested why asking for volunteer time was associated with higher contributions. They concluded, “Considering time appears to activate goals of emotional well-being and beliefs involving personal happiness. Such a mind-set leads to greater willingness to make an actual donation (p. 552).”

Giving is sensitive to changes in permanent income and in tax rates Jon Bakija (Williams College) and Bradley Heim (now at the U.S. Treasury) examined multiple years of data for a large file of tax returns. 26 Among other findings, they confirm earlier work (Randolph, 1995) that reveals changes in giving are larger when income changes permanently (e.g., a salary raise) than when there are transitory income shifts (such as a bonus or tax

rebate check). They also find that for every 1 percentage point drop in a household’s tax rate (e.g., from 35 percent to 34 percent), a household can be predicted to give 0.7 percent less (giving does not fall as far as the tax rate drops, but giving does fall when the tax deduction benefit is lower). Further, when a tax-rate change that lowers the amount households can deduct for contributions is publicized in advance, people will increase their charitable giving before the rate change. This is especially true for high-income households.

Stability of income matters in giving Patricia Hughes and William Luksetich (both affiliated with St. Cloud University, Minnesota) find that a high level of variability in annual income negatively affects contributions. 27 These authors suggest that nonprofit organizations should recognize the importance of income stability and create channels for stable donations. Arrange for payroll deductions, automatic transfers from a checking account, or pre-approved monthly charges on a credit card.