FairTax Overview
The FairTax increases the incentive to give.
The incentive for giving to charitable organizations is not diminished in any respect by the FairTax. It
increases. Under the FairTax, wage earners are taking home their entire paychecks – for families of
modest means, whose charitable giving is often a very high percentage of their income, this is a
substantial increase in available funds. Additionally, these contributions are also made with pre-tax
dollars. Under the current system, the charitable deduction only offsets a portion of a taxpayer’s tax
liability. For those generally less affluent taxpayers who do not itemize, the price of charitable giving
actually goes down under the Fair Tax because they are able to give to their churches or other charitable
organizations from pre-tax dollars.
Under the FairTax, the two-out-of-three taxpayers who currently do not itemize deductions are not
taxed on charitable contributions, and therefore, for the first time since 1986, the vast majority are
actually encouraged to make charitable contributions. It should be noted that percentage ceilings
also limit individual contributions today – even if a taxpayer itemizes. For example, all
contributions are limited to fifty percent or less of adjusted gross income. This percentage is ten
percent for corporations. These ceilings all disappear under the FairTax.
According to Giving USA, charitable contributions totaled $290.89 billion in 2010.72 Of this
amount, 58.5 percent or $170.24 billion was claimed by the 33 percent of individual taxpayers who
itemized deductions on their 2010 federal tax returns. 73 When the effect of the increase in income from
the FairTax is combined with the effect of the change in the price of giving for both itemizers and nonitemizers, recent research by Beacon Hill Institute finds that charitable donations would increase under
the FairTax by $2.06 billion. This translates to an 0.89 percent increase in the first year (2007), an
increase of 2.40 percent within 10 years of its introduction, and an increase of 4.99 percent after 20
years. These increases are in comparison to a baseline in which the current tax regime continues.74
When do people increase their giving and when do they cut back? It’s the economy!
Charitable giving is more a function of the economy than of the tax code. The common phrase, “It’s the
economy, stupid!” applies here yet again. Over the past forty years, the level of annual donations almost
exactly tracks personal income growth.75,76
72
Giving USA 2011: The Annual Report on Philanthropy for the year 2010.
Internal Revenue Service Statistics of Income Data, Table 2.1 Returns with Itemized Deductions: Sources of Income,
Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items, by Size of Adjusted Gross Income, Tax Year 2010.
74
Tuerck, David G., Jonathan Haughton, Alfonso Sanchez-Penalver, Sara Dinwoodie, and Paul Bachman, “The FairTax and
Charitable Giving, Beacon Hill Institute, February 2007.
75
Moore, op. cit.
76
“The most overwhelming proof that tax incentives have a relatively minor effect on individual charity is the tremendous
consistence over time of giving as a percentage of income. Although the tax code has changed frequently and dramatically
over the past 23 years, giving as a share of personal income has hovered around 1.83%. This measure reached as high as
1.95% in 1989 and as low as 1.71% in 1985. The narrow range has persisted even though the top marginal tax rate has
fluctuated in that period between 28 and 70 percent. It suggests that raising income ܛ