Scenario Analysis: High, Uneven,
and Flat Economic Growth
To understand the full scope of the dynamic giving environment in 2018 and 2019, scholars, fundraisers, and other practitioners must consider the macro-economic climate as well as potential behavioral responses to the Tax Cuts and Jobs Act passed at the close of 2017. While no one can know exactly how the confluence of these factors will play out for American philanthropy in the coming years, we present three potential scenarios outlined by economists in the aftermath of the tax law. These scenarios provide helpful context on the possible effects of specific policy changes and broad economic conditions for users of The Philanthropy Outlook to consider.
The following scenarios assume that the change in giving by individuals due directly to tax reform is negative. While households will have a greater amount of after-tax income, the decrease in tax incentives for giving that virtually all households will see under the new law will likely have a larger effect on giving than the effect of households having greater income. The Indiana University Lilly Family School of Philanthropy and Independent Sector’s Tax Policy and Charitable Giving Results report, which found that households are responsive to changes in their tax price of giving, supports this assumption.
It is important to note that giving by estates is not mentioned in the following scenarios, because bequest giving is slower to react to policy changes, and the timing of bequests can be difficult to predict from year to year since people do not plan when they will pass away or when their estates will be processed. In general, strong market performance typically leads to higher bequest giving, and this can be applied to all scenarios.
The High Growth Scenario
The U.S. economy was growing at a healthy pace at the end of 2017, with the unemployment rate at a 17-year low of 4.1%. Over the course of 2017, two million jobs were added, the stock market had risen 19%, inflation was low, and consumer spending was accelerating.
As such, some economists contend that, barring major world events such as an armed conflict or trade war, we can expect more of the same in 2018.50
These economists believe that the individual and corporate tax cuts contained in the Tax Cuts and Jobs Act will build on the momentum generated in 2017. For instance, J.P.Morgan projected that leaving money in the hands of individuals and corporations as result of tax savings will add between 0.5 and 1.5 percentage points to GDP growth over the next few years. Although expiration of the new tax cuts for individuals in 2025 makes their long-term impact uncertain, this windfall may translate into a short-term surge in consumer spending.51
The same economists concede that the long-term effects of the Tax Cuts and Jobs Act will depend on ongoing capital investment and consumer spending, and that the full impact of the legislation could take many years to realize.52 They also argue that slow growth in productivity, and thus wages and living standards, could deepen inequality between the wealthiest Americans and the rest of society further in the future.53
In the “High Growth Scenario,” however, these long-term issues would pose no deterrent to giving in 2018 and 2019. While we would anticipate the loss of tax incentives to have a dampening effect on giving by some households, particularly those who will now use the standard deduction instead of itemizing, the performance of the economy overall—particularly if personal income, net worth, and consumption experience strong growth—would help offset this dampening effect.
In addition, corporate giving, buoyed by corporate savings and strong consumer sentiment, would remain solid. Foundation giving would also be very strong, since market and GDP performance is closely linked to growth in foundation giving, and there is less in the tax reform package that should have any sort of downward effect on foundation giving.
The Uneven Growth Scenario
Some economists have emphasized that, when changes were made to the Tax Cuts and Jobs Act as it made its way through the House and Senate, the bill shifted focus away from middle-class families.
For example, the legislation made tax cuts for individuals temporary, while leaving the cuts that impact corporations in place. Senators also increased benefits for pass-through businesses—a move that experts have said disproportionately affects the wealthy.54
Proponents of the tax law argue that providing tax cuts to corporations and wealthy business owners will boost the economy, leading to additional jobs and higher wages. Others question whether working-class Americans will ultimately reap these benefits or if most of the gains will go to those at the top.55 Some economists contend that the benefits of the tax legislation may take longer than predicted for the average American to see. They argue that, even if corporate tax cuts may ultimately increase wages, this trickle-down effect will not happen for many years.56
The effects of the “Uneven Growth Scenario” would be different across individual subsectors. Organizations more reliant on smaller donations from less wealthy donors would have cause for concern, while nonprofits that receive funding from high-net-worth individuals/households would be better able to weather this change.
Aggregate giving estimates would hide much of this disparity. High-net-worth households are already responsible for such a large portion of individual giving that enough economic growth—particularly in terms of market performance and disposable personal income—even if concentrated almost entirely among high-net-worth households, would result in growth in individual giving. This growth, although lower than in recent years, would likely still be positive.
Corporate giving may or may not increase; strong economic growth may not do enough to offset the decrease in tax incentives, particularly if overall consumer sentiment is weak. Foundation giving would be very strong due to market and GDP performance.
The Flat Growth Scenario
The swift pace at which the Tax Cuts and Jobs Act was passed have left many of those studying the law concerned about potential uncertainties and unintended consequences that the Internal Revenue Service (IRS), the Treasury Department, and the courts will need to resolve over the course of its implementation.57
These agencies must also quickly write new regulations to implement the new legislation, which governs everything from the tax code for businesses that do not organize as corporations to the endowments of large universities.58
For instance, in the immediate aftermath of the tax law’s passage at the end of 2017, there was widespread confusion about the provision of the legislation that caps the previously unlimited state and local tax deduction. This provision did not take effect until January 2018 and the law explicitly prevented people from pre-paying their state income taxes. However, it did not address the pre-payment of property taxes, leaving homeowners a narrow window in which to pay their 2018 property taxes in 2017 to try to take advantage of the full deduction.59
In addition to confusion regarding implementation of the Tax Cuts and Jobs Act, observers have expressed concern about opportunities for loopholes to be exploited. For instance, tax experts have historically questioned the government’s ability to protect the tax deduction for businesses that pay taxes through their owners’ individual returns from being abused. A potential impact of this confusion would be to further dampen individual giving, at least temporarily. Households tend to be risk-averse, and if it’s not clear how to best maximize the benefit of a large gift (i.e., lower their cost of giving the most), they may delay that gift until they’re more certain.
Other sources of confusion are less about real gains or losses to the nonprofit sector and more about where money is counted. For instance, officials in high-tax states were considering workarounds to changes in the state and local tax deduction at the start of 2018 that would allow households to donate to charitable entities established by state and local governments.60
Under the “Flat Growth” scenario, broad implications for charitable giving are difficult to ascertain. Not only do the effects remain to be seen, but it is difficult to be sure of the specific causes behind the effects. Additional unintended consequences not considered here are possible as well, and the directional impact they would have on giving is unknown. It is likely that the effects would dampen total giving (households would exploit loopholes that would decrease their marginal tax rate, thus lowering their tax incentive to give and leading to less giving overall), but it is unclear whether this would happen in all scenarios. Some cases, such as the property tax workaround, would also introduce a confounding factor into the data, making it a challenge to see any true increase or decrease in giving.