Forbes Reports: How much will charitable giving drop? There’s no precise answer, of course. And, by some reckonings it could be substantial. For instance, if charitable giving took the full hit of the new deduction limitation—and all charitable giving by households earning more than $300,000 were reduced by three percent—that same couple earning $400,000 could reduce their charitable contributions by as much as 30 percent (assuming a dollar decrease for each dollar reduction in deductibility—what the economists call an elasticity of 1.0).
It’s worth keeping in mind that, 2010, when Indiana University’s Center on Philanthropy modeled the effect of a limitation proposed by the Obama Administration –one that would have limited the value of all deductions to 28 percent of their total, even for taxpayers in higher tax brackets—the drop was estimated to be just 1.3 percent. (That’s still around $2.25 billion, though.) That takes into account elasticity—the responsiveness of individuals to particular changes in cost – here the after-tax cost of charitable giving. Taking that into consideration, the effect of the fiscal cliff deal is likely to be smaller than a 30 percent reduction. Indeed, if one uses the Indiana study as a guide, even if charitable contributions take the full hit, the reduction would fall closer to at most a five and-a-half percentage point reduction; about $9.5 billion.