Corporate Taxes and Charitable Giving: Why Raising Corporate Taxes Would Harm Philanthropy

Executive Summary

Corporate philanthropy plays a vital role in supporting social, educational, and cultural initiatives, with U.S. corporations donating nearly $37 billion in 2023, marking a 3 percent increase from 2022.
Beyond corporate giving, the dynamic effects of a thriving business environment mean charitable donors of all types have greater means to donate to charitable causes that support communities in need. Prior research finds for every 10 percent increase/decrease in income, a donor increases/decreases charitable giving by 7 percent.
Despite the valuable contributions of corporate philanthropy and the interplay between economic dynamism and charitable giving, some policymakers and advocates have called for raising the statutory corporate tax rate.
Research consistently shows corporate income taxes are the most harmful form of taxation for economic growth, directly chilling corporate giving by reducing the resources available for charitable contributions.
Higher corporate taxes create a domino effect that harms the nonprofit sector by reducing direct financial contributions, weakening overall economic growth, and diminishing the ability of businesses and individuals to support charitable causes.
Corporate donations support a wide range of social programs, educational initiatives, cultural institutions, and community development projects. A decline in corporate giving could lead to reduced funding for these critical areas, negatively impacting the beneficiaries of corporate philanthropy.
Given the themes explored in this paper, policymakers should consider the potential harm to economic activity and corporate philanthropy, which supports critical social, educational, and community initiatives, before implementing changes to the statutory corporate tax rate.

Introduction

Corporate philanthropy has long been an integral part of the broader charitable landscape, contributing significantly to various social, educational, and cultural initiatives. In 2023 American corporations donated almost $37 billion to charitable organizations, a 3 percent increase compared to 2022 corporate giving.¹

Currently, corporations donate approximately 1 percent of their pre-tax profits to philanthropic causes annually. In historical context, this figure represents a significant increase from around 0.7 percent a decade ago and only about 0.3 percent as far back as 1936.² The practice of corporate giving is not merely a gesture of goodwill but is also influenced by a complex interplay of economic incentives and corporate strategies.

Despite the valuable contributions of corporate philanthropy and the economic interplay between economic dynamism and charitable giving, some policymakers and policy advocates have called for raising the statutory corporate tax rate. The Biden administration says the corporate income tax rate should be raised from 21 percent to 28 percent, while some policy groups on the populist-right similarly argue for raising the corporate rate to 25 or 28 percent.³ ⁴

This paper contends increasing corporate income taxes would harm philanthropic generosity by reducing the financial capacity and incentives for corporations to donate, supported by a detailed review of economic literature and empirical evidence. Beyond corporate philanthropy, the dynamic effects of raising taxes on businesses through economic channels would have broader negative effects on all forms of charitable giving. Raising the statutory corporate income tax rate would be a lose-lose for charities and communities that depend on them.

Corporate Giving Supports Communities

Corporate philanthropy in the United States has evolved significantly over the decades. In the early 20th century, corporate giving was relatively modest. For instance, in 1936, corporations donated approximately 0.3 percent of their pre-tax profits to charitable causes. Over the years, the landscape of corporate giving has changed, with donations rising to around 1 percent of pre-tax profits today. This increase can be attributed to several factors, including but not limited to changes in corporate policies, increased societal expectations for corporate social responsibility, and tax deductibility that encourages charitable contributions.

Many renowned corporations donate generous amounts to charitable causes every year. For example, Google has a matching gift program and will match donations of employees up to $10,000 each year.⁵ Google also donates $100 million a year in grants and $1 billion in products every year. PricewaterhouseCoopers (PwC) has donated over $200 million through its PwC Charitable Foundation, including $23 million to support veterans by providing pathways to access affordable education for 375,000 veterans.⁶ However, it isn’t just large corporations that engage in philanthropic activity. Small and medium sized businesses also donate generously to charitable causes. According to some survey reports, as many as 75 percent of small business owners donate an average of 6 percent of their profits to charitable organizations annually.⁷

The concept of corporate philanthropy encompasses various motivations, ranging from altruism to strategic business interests. Companies often engage in philanthropy to enhance their public image, build goodwill among customers and employees, and foster positive community relations. Additionally, corporate donations can align with business objectives, such as supporting education initiatives to develop a skilled workforce or funding environmental programs that benefit the company’s operations.

Corporate Taxation: What Hurts Growth Hurts Charity

The impact of corporate income taxes is often misunderstood. There is a common misconception among advocates for higher corporate tax rates that this tax burden is passed onto corporate CEOs or shareholders. However, the empirical literature makes very clear the brunt of the tax burden is carried by workers and consumers in the form of lower wages and higher prices.⁸

Beyond the incidence of corporate taxation, the evidence shows corporate income tax is the most harmful form of taxation for economic growth, innovation, and dynamism. As charitable giving typically amounts to about 2 percent of national income-а trend that has been consistent for several decades-any changes in economic activity are consequential for trends in charitable giving.

The Organization for Economic Cooperation and Development (OECD) investigated the design of tax structures to determine which forms of taxation diminish economic growth the most.⁹ The authors concluded “Corporate taxes are found to be the most harmful for growth.” Another OECD analysis published in 2008 summarized the following findings: “Within income taxes, those on corporate income seem to be associated with lower levels of GDP per capita than personal income taxes. In fact, corporate income taxes appear to be the least attractive choice from the perspective of raising GDP per capita.”¹⁰

Similarly, a 2011 study published in The Economic Journal found corporate income taxes “to be the most harmful for growth as they discourage the activities of firms that are most important for growth: investment in capital and in productivity improvements.”¹¹ Finally, a 2015 journal article published in The Review of Economic Perspectives noted how corporate income taxation “lowers the return of capital, inflow of FDI, employment or investment into the human capital, and through these channels it also affects the economic growth. … When comparing absolute impact of taxation, corporate taxes, followed by personal income taxes and value added taxes seem to harm the most.”¹²

Aside from the direct impact of corporate taxation on corporate philanthropy, the broader economic impact of a higher corporate tax burden reduces the level of support for communities dependent on donor generosity. Changes in tax policy that reduce economic growth and dynamism also reduce charitable giving as the share of the economic pie committed to charity for communities that rely on it doesn’t grow as robustly as it would in the absence of a higher corporate tax burden.

Tax Deductibility and Its Role in Corporate Giving

While corporate taxation hinders charitable giving by reducing economic dynamism, the tax code is structured in a way that allows corporations to donate pre-tax dollars to charitable causes. Tax deductibility of charitable contributions is a key driver of corporate philanthropy. Under current U.S. tax laws, corporations can deduct up to 10 percent of their income for charitable purposes and may carry forward excess donations for five years.¹³ This provision serves as a significant incentive for corporations to engage in philanthropy, as it reduces the effective cost of giving. By lowering the tax burden on donated income, the tax deduction encourages corporations to allocate a portion of their profits to charitable causes.

Organizations such as Keystone (formerly the 5 Percent Club) in Minnesota exemplify the commitment of corporations to philanthropy.¹⁴ Keystone comprises around 200 companies that donate at least 2 percent of their earnings, with approximately 100 of these companies giving 5 percent or more. This level of commitment underscores the importance of tax incentives in fostering corporate generosity. The ability to deduct charitable contributions from taxable income makes philanthropy more financially feasible for corporations, enabling them to support a wide range of social programs and initiatives.

Impact of Tax Rates on Corporate Giving: What the Literature Says

Economists, philanthropists, and academics have attempted to measure the impact of tax policy on philanthropic generosity for decades. Economic studies consistently show corporate giving is sensitive to changes in tax rates. The elasticity of corporate giving with respect to tax rates indicates how responsive charitable donations are to changes in tax policy. Several studies have explored this relationship, providing valuable insights into the potential impact of raising corporate taxes on philanthropic generosity.

The tax price—the cost of giving after accounting for the tax deduction-plays a crucial role in determining corporate donations. Schwartz’s (1968) seminal research revealed a significant negative elasticity (-1.57) with respect to the tax price, indicating an increase in the cost of giving significantly reduces donations.¹⁵ This means while higher tax rates make the charitable deduction more valuable, the overall effect of raising the tax price outweighs that incentive. Similarly, Nelson (1970) estimated a tax price elasticity between -1 and -1.2, showing higher taxes are likely to dampen corporate philanthropy, even when the deduction becomes more attractive.¹⁶

Firm-level studies provide further confirmation of the negative impact of higher taxes on corporate giving. Boatsman and Gupta (1996) analyzed panel data from 212 donor firms between 1984 and 1988.¹⁷ Their fixed effects estimates suggested a negative correlation between giving and tax rates, with an implicit elasticity coefficient of 0.35 for giving with respect to the tax rate evaluated at mean values. This suggests as taxes rise, companies reduce donations, as higher tax burdens leave fewer financial resources available for philanthropy.

Economic studies consistently show corporate giving is sensitive to changes in tax rates.

Similarly, Carroll and Joulfaian’s (2005) study of 77,555 corporate tax returns for 1991 observed a lower tax price for corporations that contribute to charity compared to those that do not.¹⁸ Using multivariate estimates, the authors found a strong negative tax elasticity (-1.8), indicating higher taxes significantly reduce corporate giving by making charitable contributions less financially appealing.

Taxes Reduce Income and Profit, Which Leads to Fewer Resources to Give

In contrast to the tax price, income elasticity measures how changes in a corporation’s profits influence its giving. Numerous studies highlight a positive relationship between corporate profitability and giving. Schwartz (1968) found corporate income and cash flow have positive elasticities (0.63 and 1.33, respectively). So as corporate income and cash flow increase, corporations respond by increasing charitable donations. In a similar vein, Nelson (1970) found an income elasticity of 0.68. This is roughly consistent with the literature (Clotfelter, 1985; Auten et al., 2002; Bajika and Heim, 2008) which finds for every 10 percent increase/decrease in income, a donor increases/decreases charitable giving by about 7 percent.

Bennett and Johnson (1980) found an income elasticity of 0.58, while McElroy and Siegfried (1982) reported 0.72.¹⁹ ²⁰ Clotfelter (1985) further supported this, estimating an income elasticity between 0.5 and 0.6 over a long historical period using a time series analysis covering 1936-1980.²¹ These results show as corporate profits rise, so does philanthropic activity. When corporate profits are reduced by higher taxes, expect a corresponding decrease in donations.

Overall, these studies collectively highlight the positive relationship between corporate profits (and cash flows) and giving, and the negative impact of higher tax rates on charitable donations.

The Broader Economic Impact of Higher Corporate Taxes

Beyond the direct effects on income and the tax price, higher corporate taxes also exert a broader economic influence. Raising taxes reduces the overall capital stock, lowers productivity, and ultimately slows economic growth. This diminished economic environment leads to fewer resources available for philanthropic activity, as companies focus on core business operations rather than charitable giving. Webb’s (1996) literature review affirms these findings, summarizing the general conclusion of a negative relationship between higher tax rates and corporate donations.²²

Specifically, Webb summarized the literature by noting: “Positive relationships have been found between corporate profits and giving, and corporate assets and giving. A negative relationship has been found between tax rates (the price of giving) and gifts, and unclear relationships have been found between other variables and giving.”

Theoretical Framework: Profit Maximization vs. Utility Maximization

The motivations behind corporate giving can be understood through the lens of two primary theoretical frameworks: profit maximization and utility maximization. The profit maximization model posits corporations engage in philanthropy to enhance financial performance, leveraging charitable activities to improve their public image, strengthen customer loyalty, and attract top talent. In this model, corporate donations are viewed as strategic investments that generate long-term business benefits.

Conversely, the utility maximization model suggests corporations donate to charity for reasons beyond financial gain, including altruism and social responsibility. According to this framework, corporate philanthropy is driven by a desire to contribute positively to society, reflecting the values and ethical commitments of the company and its stakeholders. While financial considerations are still relevant, the utility maximization model emphasizes the intrinsic satisfaction and social impact derived from charitable activities. However, it is important to note that corporate environmental, social and governance (ESG) initiatives and divestment campaigns, which we view as often misguided, may ultimately harm corporate profitability and undermine the long-term sustainability of charitable giving.

Empirical studies support the notion that corporate giving is influenced by a mix of profit-maximizing and utility-maximizing motivations. For instance, Schwartz (1968) found corporate donations are sensitive to tax-determined prices, indicating tax benefits play a significant role in philanthropic decisions. However, the presence of positive income and cash flow elasticities suggests corporations also prioritize financial health and strategic goals when determining their level of charitable contributions.

Implications of Raising Corporate Taxes

Proposals to raise the statutory corporate income tax rate have significant implications for corporate philanthropy. Higher tax rates would increase the tax price of giving, reducing the financial attractiveness of charitable contributions. This change would lead to a decline in corporate donations as companies face a higher cost of giving and have fewer financial resources available for philanthropy. The empirical evidence reviewed in this paper underscores the sensitivity of corporate giving to tax policy, with numerous studies demonstrating a negative relationship between tax prices and charitable donations.

In addition to the direct impact on the cost of giving, higher corporate taxes would also affect the overall financial capacity of companies to engage in philanthropy. Increased tax burdens reduce corporate profits and cash flow, limiting the funds available for charitable contributions. This indirect effect further exacerbates the potential decline in corporate giving, as companies prioritize their financial stability and strategic objectives in the face of higher taxes.

As the corporate tax burden rises, donors (and potential donors) have less disposable income to contribute to charitable causes. Prior research has found for every 10 percent increase/ decrease in income, a donor increases/decreases charitable giving by 7 percent.²³ From a higher level, the broader economic impact of higher corporate taxes means a reduced capital stock, lower productivity, and subsequently less overall economic growth. As charitable giving typically amounts to about 2 percent of national income—a trend that has been consistent for several decades—any changes in economic activity are consequential for trends in charitable giving.

As charitable giving typically amounts to about 2 percent of national income—a trend that has been consistent for several decades—any changes in economic activity are consequential for trends in charitable giving.

The reduction in corporate philanthropy resulting from higher taxes would have broader social implications. Corporate donations support a wide range of social programs, educational initiatives, cultural institutions, and community development projects. A decline in corporate giving could lead to reduced funding for these critical areas, negatively impacting the beneficiaries of corporate philanthropy. Nonprofit organizations and charitable causes that rely on corporate support would face greater challenges meeting their financial needs and achieving their missions.

Conclusion

Raising corporate income taxes poses a significant threat to philanthropic generosity, as higher taxes reduce the financial capacity and incentives for corporations to donate. The empirical evidence demonstrates a clear relationship between tax rates and corporate giving, indicating higher taxes would likely lead to lower levels of charitable contributions.

Policymakers should carefully weigh the purported benefits of increasing tax rates against the damage to economic activity and subsequent decrease in corporate philanthropy, which plays a vital role in supporting a wide range of social, educational, and community initiatives.

As policymakers and policy advocates from left and right call for increasing the statutory corporate tax rate, it is essential to recognize the unintended consequences this policy change would have on corporate philanthropy and philanthropic generosity more broadly.

Mentioned on this page

United States Washington Internal Revenue Service United Kingdom Joe Biden Minnesota Google National Review George Mason University The Hill University of Chicago Press National Bureau of Economic Research Vanderbilt University