July 15 is the revised Tax Day in the U.S. While Tax Day was originally scheduled for April 15, the U.S. government and multiple states changed the day some state and all federal taxes were due as a result of the COVID-19 pandemic.
How is giving affected by taxes? What role does the economy play in driving philanthropic decisions? How and in what ways is philanthropy impacted in any given year by changes in macroeconomic trends and tax policies?
To answer these questions, Patrick Rooney, executive associate dean of academic programs and professor of economics and philanthropic studies at the Lilly Family School of Philanthropy, shared his expertise and research on macroeconomics and how taxes affect charitable giving.
“People give for a number of reasons,” Rooney said. “Some give simply to give back. Some pay it forward. Others may feel a religious obligation or a desire to properly steward and share the resources that they have been given.
“If you think of philanthropy as helping friends or neighbors (what we consider as informal philanthropy), everyone is most likely a philanthropist in some sense.”
Individual giving (including bequests)
When conducting research on individual giving, the S&P 500 Index is used as a summary of household wealth.
“It’s not a perfect summation, but it is a good indicator of trends in household wealth. As the S&P 500 goes up, people tend to give more,” Rooney said.
“We also use personal income as a predictor of household giving and GDP as a basis for growth of personal income. As personal income increases, individuals tend to give more.”
Bequests are more difficult to correlate with the economy, as they are unable to be timed with economic trends.
“If people do pass when the economy is better and they leave a percentage of their estate to charity/charities, then charitable bequest numbers will increase,” Rooney said.
Rooney explained that the economy can cause foundation grantmaking to go up for two reasons.
- The Portfolio Effect
“If the foundation’s dollar value of assets increase in value, then the foundation has more money to give,” he said. “Foundations have to give five percent of their asset base. They might base it off of last year’s asset base, or they might use a three-to-five-year moving average, but regardless, they have to give five percent away.
“If the portfolio effect is positive, then the stock market rises in value and foundations are going to give more away. If the stock market is falling, foundations’ asset bases are declining. However, because they often use a moving average, the decline in the stock market has a less steep effect on foundation grantmaking than it does on household giving. The effect is still visible, though.”
- The Economic Effect
“When people are doing better financially and their personal portfolio is continuing to increase, they may give more money to their foundation,” Rooney said. “So, the foundation asset base grows and it has to grant out more money the following year and years after that.”
Rooney explained that corporate giving tends to be driven by corporate profits in the last year, and to a lesser degree, prior years. GDP tends to drive corporate profits. However, other factors, such as corporate income tax rates, do as well.
“Corporate giving happens for a number of reasons besides profitability,” Rooney said. “For example, profitability may decrease 10 percent and corporate giving may go down as a result, but corporate giving may not decrease that full 10 percent.”
In addition, some corporations match what their employees give to charity, and thus employees may drive corporate giving. Corporations can also “co-brand” with charities on an issue that they (the corporation) may want to align with.
Rooney also noted that corporations give to big disasters, and that observationally, these donations are on top of what they budgeted otherwise for philanthropy.
However, it remains to be seen how the COVID-19 pandemic will affect corporate giving.
Day-to-day information vs. longer-term trends
So, with this knowledge, should nonprofit practitioners follow day-to-day economic trends, or are longer-term trends more helpful to understand?
Rooney advises that nonprofits should follow both:
“On the one hand, it makes sense to follow day-to-day trends because that’s generally how we obtain news. It’s easier to follow those trends and be aware of what’s happening. That knowledge can inform your conversations with donors and prospective donors, since the economy can affect giving a great deal.
“However, we’ve conducted research into whether the day-to-day variation of the stock market matters in giving, or if giving is more likely to reflect year over year trends. It’s difficult to test, but our best assessment is that the day-to-day variation of the stock market doesn’t predict changes in giving; it is more year end to year end.”
He pointed out, though, that longer-term trends matter too.
“If you make money in the market in one year, two years, three years, and more, you’re going to feel more comfortable making big philanthropic investments or giving appreciated assets,” Rooney said.
“If your assets are diminished but you have more income, you also might give more aggressively out of your income. It can go both ways.”
Tax benefits may be one motivation for giving, but Rooney cautioned that they aren’t the only reason:
“If you care about yourself and only about yourself, you’ll always be better off not giving than taking the after-tax deduction. Even with the tax deduction, philanthropy is an altruistic act.
“However, the empirical research suggests that people who itemize their taxes give statistically significantly more than people who are non-itemizers, even when both groups are in the same income levels. You’re also more likely to give in general if you’re an itemizer than if you’re a non-itemizer.
“If you look at the Tax Cuts and Jobs Act (TCJA) of 2017, the law increased the standard deduction. Before, about 30 percent of households were itemizers. Now, we believe that it’s less than 10 percent who are eligible to itemize. So, if you’re a former itemizer, the price of giving increased by about two-thirds. It costs more after taxes to give now than before. So unless I sacrifice something else, then by accounting definition, if I were running a balanced budget, my philanthropy will decrease.
“While not everyone is ultra-rational in that way, if incentives for certain choices are taken away, they may be less likely to give as much as they would have otherwise.”
As a result, some donors may try to bundle their gifts in certain years in order to be able to claim and itemize the deduction. Rooney explained that many people created new donor-advised funds at the end of the year in 2017, possibly because they knew that they would become non-itemizers under the new tax regime. So, they wanted to earn a tax deduction at that point in time (which DAFs allow them to do).
Bearing all of this in mind, in addition to a global pandemic, a health crisis, and the ensuing economic shock and downturn, Rooney encourages fundraisers not to stop fundraising.
“For the most part, people don’t give unless they are asked,” he said. “So don’t be afraid to ask your donors to support your organization, especially as you meet increased need in the community. However, be empathetic to the current labor market conditions. The capacity to give now may not be as strong, but you can still continue to share your message and mission during this time.”