It occurred to me this morning that Trump’s tax plan, if it passed in its current form, would impact many middle- (and some high-) income U.S. Mormons.[fn1] I mean, it would affect U.S. taxpayers in general, but it would have a particular effect on the deductibility of tithing.
The church cares about deductibility. In 2011, Elder Oaks gave testimony to the Senate Finance Committee that the charitable deduction is vital to the nation’s welfare.
And why might that be? Basically, because it reduces the cost of charitable giving, at least for taxpayers who itemize their deductions (more on that in a minute). For example, imagine I’m in the 25-percent tax bracket and I itemize. If I write a tithing check for $1,000, I’ve made a $1,000 charitable donation, and the church has an additional $1,000. But the after-tax cost to me of that donation was $750.
Why? Because my $1,000 donation also gave me a $1,000 tax deduction, which reduced my taxes by ($1,000 x my marginal tax rate) = $250. In other words, the charitable tax deduction makes it less expensive for me to be charitable.
Trump is proposing two changes that would reduce the effective subsidy, though:
Raise the Standard Deduction
Trump has proposed raising the standard deduction. This year, a married couple filing jointly has a standard deduction of $12,600.[fn2] Trump would raise the standard deduction to $30,000. (Essentially, this means that nobody would pay any taxes on their first $30,000 of income.)
But here’s the thing: either you take the standard deduction or you itemize. And you only itemize if your itemized deductions exceed the standard deduction. And the big three itemized deductions are charitable donations, home mortgage interest, and state and local taxes.[fn3] So if you don’t have at least $30,000 of mortgage interest, charitable donations, and state and local taxes, you won’t itemize; you’ll take the standard deduction.
That’s fine, but it means you bear the full cost of your charitable donations. There is no federal subsidy for them.
That’s not the end of the world, of course. Only about one-third of American taxpayers currently itemize, though it’s closer to 40 percent in Utah. By doubling the standard deduction, a much smaller percentage of Americans (and Utahns and Mormons) will be able to itemize. How will that affect Mormons’ tithe-paying? No idea, but it will raise the after-tax cost of giving.
Cap on Itemized Deductions
Trump has also proposed capping itemized deductions at $200,000.
So that doesn’t affect me, and it probably doesn’t affect you. In fact, it would affect fewer than 400,000 taxpayers. But some of those taxpayers are likely to be tithe-paying Mormons. After all, if you earn more than $2 million in titheable income, you’ll only be able to deduct the first $200,000 of tithing you pay. (Quick aside: in the famous words of Tevya, if money like that is a curse, “May the Lord smite me with it. And may I never recover.”) The tremendously wealthy Mormons, then, will bear a higher after-tax cost for their tithing than those of us who fall somewhere between not itemizing and not earning millions of dollars annually.
How Will This Affect the Church?
No idea. Charitable giving is elastic, though I’m not sure if there are any studies specifically about the elasticity of religious giving, or of Mormon giving.[fn4] Maybe its only result will be that many of us have slightly less after-tax money than we do under the current tax system. Or maybe our giving goes down. Or maybe it goes up, for some reason (though that seems unlikely).
Regardless, though, if Trump’s tax proposals end up enacted into law, they will have a real effect on Mormons.
[fn1] (And yes, I get that the effects of his tax plan on Mormons aren’t, perhaps, the most pressing thing about the president-elect. But taxes are what I do.)
[fn2] There are other standard deduction amounts for unmarried individuals, married couples filing separately, and heads of household, but to make the post simpler, I’m going to stick with married filing jointly. The same patterns hold for others, only with different dollar amounts.
[fn3] And the House Republican tax plan would eliminate the state and local tax deduction.
[fn4] (I suspect there are of the former, though not of the latter.)
By Common Consent, a Mormon Blog 
Apparently, and more concerning for many Mormons, is that Trump’s tax plan will increase taxes for most families with three or more children.
http://www.factcheck.org/2016/11/trumps-tax-cut-claims/
Essentially, while the plan raises the standard deduction, it also gets rid of personal exemptions. That’s not good news for big families.
Good point, Tim. There certainly are other potential problems (if he can get his proposals through).
Sam, those are interesting points. But I think you’re not quite right when you say that raising the standard deduction would not “raise the after-tax cost” of tithing.
Suppose that a member has $20,000 of itemized deductions, including $10,000 of tithing. Under the current system, it makes sense for that member to itemize deductions, and they would reduce their taxable income by $20,000. But if the standard deduction was raised to $30,000, then that member would no longer itemize — they would take the standard deduction instead, which would reduce their taxable income by $30,000, *regardless of whether they pay their tithing.* The wouldn’t lose any tax benefit — rather, they would get the same tax benefit (and more) from the standard deduction, and that benefit would not be dependent on whether they pay tithing.
I agree that by de-coupling the tax benefit from the charitable giving, it removes some of the incentive for charitable giving. But there is no rise in the after-tax cost.
Sorry, in my first paragraph above, I meant that “you’re not quite right when you say that raising the standard deduction WOULD ‘raise the after-tax cost’ of tithing.”
CE, but it does. If you don’t get a deduction, you pay the same amount of tax whether you pay $5 in tithing or $5,000. That is, you bear the full cost of your tithing. You may pay less in net taxes (or you may not), but your taxes are completely decoupled from your tithepaying.
I think I’m missing something.
I agree it’s better to incentivize itemization, because it indirectly encourages home ownership, charitable giving, and with a very low cap higher education.
Still I’m not clear how raising the standardized deduction would penalize people for spending and giving behavior that may be itemized. It seems like while one wouldn’t be specifically rewarded for itemized behaviors one’s overall tax burden would still be reduced by the benefit of standard deduction. I agree the itemization cap would impact some people if Republicans with a mandate suddenly are willing to pass a progressive tax measure, but for average people it seems like a semantic difference. Rather than itemizing and getting a refund for part of my mortgage interest, charitable donations, and student loan interest I claim the standard deduction and get just as much money back, maybe more, although not expressly for what I itemized.
If his tax plan, or tweets as the case may be, keeps the Standard Deduction benefit flat and only raises the bar to qualify for itemization, then I agree it would make all those behaviors more costly, but that’s not how I understand your explanation.
…Little help for the slow one in the audience?
Sam, we are in agreement that the higher standard deduction would decouple the benefit from the charitable gift. But the tithe-payer in my scenario does not pay higher taxes under the potential new system. So no rise in after-tax cost of giving. (I guess there is a rise in cost *relative to the new lower tax baseline that results from a higher standard deduction.* But I’m a financial accountant and investment guy, so maybe I look at that differently from a tax accountant.)
Okay based on your comment to CE it appears the concern is that for those deducting less than $30,000 the full cost of tithing would be born by the payer rather tithing expenditures being subsidized through taxes. That makes sense, but if all other factors remained constant wouldn’t one’s net income, after taxes and tithes be that same?
Exactly, Cursed but Not Cursed Enough. I think we’re making the same point.
What if a person gives the first tenth of her income to the church instead of the last tenth, from the portion of her income that is not taxed, instead of from the portion taxed at 25% or whatever her marginal tax rate is? Then the itemized deduction is not a reduction of the net cost of tithing; it is a reduction of the expense of earning the other nine-tenths of her income, which benefit she receives due to having donated the first tenth. In that scenario, the shift from itemization to a standard deduction would not reduce the reduction of the net cost of her tithing; it just makes the question of tithing irrelevant to the expense of earning the rest of her income by having reduced that expense whether she tithed or not.
Cursed and CE, thanks for engaging! And I’m sorry my responses so far have been somewhat curt–it’s the sad fact of responding on my phone during a meeting. (Shh! Don’t tell anyone!)
Let me try to lay it out a little clearer: I don’t know if any given individual will see a net increase or a net reduction in her tax liability. The standard deduction and the cap on itemized deductions are just two parts of a larger tax reform plan (one that is still fairly amorphous and is not at all nailed down). The net increase or decrease in tax liability will result from the interaction of all of the changes.
That said, a charitable donor will bear the full cost of her charitable donations unless and until she itemizes; raising the standard deduction to $30,000 just changes the baseline. If I have less than $30,000 in itemized deductions, my tithing of $1,000 will cost me $1,000 after taxes, because it doesn’t produce a deduction. To the extent that charitable giving is elastic, then, the increased cost of giving will reduce (by some amount) the amount I give. And if I give the same amount I would have given, it will leave me with less money after taxes than I would otherwise have had. Certainly, raising the standard deduction to $30,000 may reduce my ultimate tax liability (though note that it may not: his plan eliminates the 10% bracket, which means taxpayers will pay more taxes on their first dollars of income), but there’s no subsidy of my tithing.
John, I think I get what you’re saying, but it doesn’t make any sense from a tax perspective (and I don’t think it does from an economic perspective, though I could be wrong about that). Because money is fungible, it doesn’t matter if you say you’re giving your first or your last 10 percent, because it’s all the same. For tax purposes, though, deductions come from your last dollars of income; the idea that you would deduct your first dollars of income is incoherent for tax purposes.
There is a third effect that you didn’t mention.As you state, charitable giving is elastic, meaning (for one thing) that as the price goes up, contributions go down. Trump’s plan (or at least the version the Tax Policy Center analyzed in October) would reduce the top rate from 39.6 percent to 33 percent. That’s not as drastic as hitting a $200,000 cap on deductions, but it will be felt by more taxpayers.
As for whether elasticity of religious giving is lower than that for other charitable giving, most analysts think that it is. Here’s a link to some estimates from Canada. https://www.hindawi.com/journals/isrn/2012/421789/tab4/
The hottest topic in the literature at the moment seems to be whether giving is a substitute for church attendance. The infamous Jonathan Gruber thinks that it is. Other studies disagree, but if Gruber is right, Trump could usher in a new era of higher activity rates (albeit at a financial cost).
Thanks, Last Lemming; I thought about mentioning the lower rate, decided against it, but am happy your brought it up. (A quick explanation: if the top rate drops to 33%, high-income taxpayers get less of a subsidy than they previously got. It makes giving at the top end more expensive, which means high-income taxpayers will reduce their giving by some amount. IOW, as long as charitable donations are deductible, reducing the top marginal rate should reduce the amount of charitable giving.)
And thanks for the quick look at the literature. The idea of giving as a substitute for church attendance is a fascinating idea, one that hadn’t occurred to me. I’ll have to give it a look.
Sam Thanks for the interesting post and the replies.
I think this is like the BCC Post about the former tithing system early Bishoprics developed before our contemporary flat 10% income based tithe: I won’t really be able to speak clearly about it until the rules are clear enough to model.
When that topics essay came out I was a discussing it among Bishopric Members and was trying to explain how, to me, it seemed to have been a fairly progressive system relative to our current practice, which I see as regressive. While all involved were in either tax or finance roles professionally no consensus could be found.
Nerding out that evening I created a model to compare scenarios using the basic structure the early Bishops provided. I found pretty much no matter how one interpreted and accounted for needs versus wants to determine surplus subject to tithes pretty much no one making less than $200,000 a year would face a material tithe burden, which really surprised me.
For now I’ll have to trust your tax jedi powers.
Actually your JI post spurred that discussion, not Gospel Topics:
http://juvenileinstructor.org/understanding-interest-in-joseph-smiths-original-tithing-revelation/
In some other nations tithing can not be written off. Specifically in Japan there are only a small handful of NGO that are allowed as write off…everything else is personal charity and you pay taxes on it no matter what. It’s a hard thing to loose that benefit, but you aren’t alone.
I suspect that if the charitable donation deduction were to go away a higher percentage of members would pay on net rather than gross.
I’d be interested in seeing tithing payment rates (and also tithing deduction rates) compared between members in different countries. Nicole (above) said that tithing isn’t deductible in Japan. In Australia we can deduct 75% of our tithing donations (but 100% of fast offering). There would be countries where you can’t deduct it at all.
Aussie Mormon, that would be really cool.
I suspect that any changes to the tax code will have a negligible effect on tithing. Most Mormons don’t pay tithing for the tax deduction. That said, it certainly might affect their giving to other charities, such as the Red Cross or the American Cancer Society or the Salt Lake Rescue Mission. Still, we need to do something to increase our tax revenue so that we actually pay for all the stuff we insist government do for us (and that includes, especially, Republicans, who still want all the benefits but don’t want to pay for them).
It’s rather ironic, I think, that it’s generally the red states that pay less in taxes than they get back from the federal government. Blue states generally pay more than they get back. So, if Trump’s tax plan reduces revenue, as it is predicted to, it will be the red states that will be hurt the most. It would be nice if the GOP finally got over that nasty case of supply-siditis it contracted back in the 1980s. If not, it may prove terminal.
To think about (meaning I’m musing, not propounding) — We often talk about income, deductions, and taxes in terms of “marginal effect” and “elasticity.” I wonder whether the Mormon LDS reaction to this kind of change in the U.S. tax system might be a step change rather than a marginal change? I’m thinking of a large one-time shift from 10% on gross to 10% on net. Anecdotally, I hear more about a net calculation in countries where tithing is not deductible.
Interesting idea, Chris. Alternatively, it could cause people to save up tithing to pay in chunks (e.g., if you have $100,000 of titheable income a year, maybe you put your tithing into a savings account and pay it to the church every three years. That way, you get the standard deduction for two years, then get the deduction the third).
Sam, people already do that by paying early/late. I am paid on the 30th so, I can pay tithes early for December, or after I get paid in January. If I time it right I can get an extra months worth of tithes paid in one year and my itemized deductions exceed the standard deduction every other year.
I was thinking about the “chunks” approach just before reading those last two comments. I think we might just do that.
But at issue is a person’s sense of what “full tithe payer” means, and how you feel inside when declaring that. Can you feel good about claiming yourself a full title payer if not paid in full by end of year? If you chunk into the next year? I always thought so. However, my current bishop likes to add during tithing settlement that as long as you are paid in full “by the end of the year,” then you can declare yourself a full title payer. So even if I myself feel comfortable with chunking, how do I look my bishop in the eye and make that declaration and feel honest about it, knowing that I am ignoring his just-stated rules.
Also, I know many members who pay as frequently as possible, as for them, tithing paid means immediate blessings, albeit not necessarily financial. In that personal religious construct, Tithing saved in a savings account means blessings delayed. Not saying that is necessarily my take on it. But I really think that the tax laws will not affect tithing payments as much as individuals’ personal faith construct of this principle.
If tax law changes lead to different social norms in the church, though, or even an official church statement making fluidity seem more acceptable to members, then that could change the personal practices over time.
Never really understood the value of declaring yourself a full tithe payer in December. My Temple Recommend usually doesn’t expire and need renewing until the Spring. That’s when declaring myself a full tithe payer has value for me.
I’m self-employed. There’s no way to know how much I owe in tithing until after the end of the year, when I can finally sit down and look at how much my business made and how much it spent. I can try making monthly payments, but depending on how well my business does in any given year (and that fluctuates, sometimes wildly), but using that method I may substantially overpay or underpay. I really wish they’d wait until mid-January or so to do tithing settlements…
Every time changes in the charitable deduction are proposed (reducing, capping or eliminating), the charitable groups most opposed are the arts organizations, some of which are still fighting their way out of the recession. Their donors are predominantly the wealthiest itemizers. To lower rates, the national debt demands a continuation of the progressive reduction in deductions which is not new. Perhaps arts organizations must be a casualty. I hope not but I know it will take some creative thinking by lawmakers and the charities. Like Wally above, I think tithe payers will adjust rather quickly but I’m not at all sure about donors to other nonprofits. There have been a number of independent studies suggesting annual losses in the billions to the arts alone.
Although this is slightly off topic, I think it’s important to consider the impact repealing the estate tax could have on charitable giving as well. That is a proposal of both Trump and Paul Ryan. While it is unlikely that this will have much of an impact on tithing, it could have a large impact on other charitable giving. I know a few wealthy members who donated most of their estate (in an effort to get their taxable estate under the exemption amount) to the missionary fund or other such church related funds.
It is also important to note that most Republicans believe in cutting government funding to social programs helping the poor in favor of leaving that work to private charitable organizations. I think it is going to have a huge negative impact on the poor to cut government funding and set tax plans that discourage charitable giving.
To clarify: by “discourage charitable giving” I really meant “don’t encourage charitable giving.”