Giving Without Gaming

Replacing the charitable deduction with a credit that works for everyone

By Matt Sly

Status: Working draft. This is a deeper dive companion to the charitable giving credit introduced in Income Tax Reform. It covers the donor-advised fund tension, the interaction with appreciated asset donations under the Lifetime Gains Framework, and open design questions. Feedback welcome at me@mattsly.com.

The Problem

The charitable deduction is structurally regressive. A $10,000 donation is worth $3,700 in tax savings to someone in the 37% bracket and $1,200 to someone in the 12% bracket. The wealthier you are, the cheaper it is to give. After the TCJA doubled the standard deduction, roughly 87% of filers no longer itemize, meaning the charitable deduction now benefits only the top ~13% of filers. The tax incentive for charitable giving has effectively vanished for the vast majority of Americans.

Meanwhile, donor-advised funds (DAFs) have become a major tax planning vehicle. A donor gets an immediate tax deduction for contributing appreciated assets to a DAF, but the DAF has no legal requirement to ever distribute those funds to an actual charity. DAF assets exceeded $234 billion in 2023, with billions sitting in accounts indefinitely. The current system subsidizes the act of parking money, not the act of giving.

The Proposal

Replace the charitable deduction with a 50% credit on donations, capped at 5% of tax liability.

Key properties:

Flat value regardless of bracket. A $1,000 donation generates a $500 credit whether you earn $50,000 or $5,000,000. The incentive to give is democratized.
Auto-scales with income. The 5% liability cap means higher earners can claim larger credits in absolute terms, but charity can never become a dominant tax avoidance strategy (95% of your liability is untouchable).
Reduces the mega-donor subsidy. Under current law, a billionaire can deduct $10 million at the 37% rate ($3.7 million in tax savings). Under this system, the maximum credit is 5% of their total tax liability, dramatically limiting the tax benefit of very large gifts.

Additionally, address the DAF loophole through either a minimum annual distribution requirement (e.g., 5% of assets, mirroring private foundation rules) or a time limit on undistributed balances.

The Tension with the Lifetime Gains Framework

The Lifetime Gains Framework treats every change of tax ownership as a realization event. Logically, donating appreciated stock to a charity (or a DAF) is a change of tax ownership and should trigger realization. But if charitable donations trigger capital gains tax, the incentive to donate appreciated assets collapses. This is the single largest design tension between the capital gains framework and charitable giving policy.

Three options are under consideration:

Exempt charitable donations from realization but impose DAF distribution requirements to prevent the shelter.
Trigger realization but offset with the charitable credit, so donors still benefit but the gain is recognized.
Trigger realization for DAF contributions only, preserving the incentive for direct charitable gifts while closing the DAF parking strategy.

Each has tradeoffs. This proposal will recommend one after further analysis, particularly of behavioral responses (how much would charitable giving decline under each option?).

Open Questions

Calibration of the credit rate and cap. 50% match and 5% liability cap are starting points. The right numbers depend on revenue targets and desired incentive strength.
DAF distribution rules. What minimum annual distribution rate effectively prevents indefinite warehousing without creating perverse incentives to rush grants to unvetted organizations?
Interaction with state charitable deductions. Some states have their own charitable deductions. Federal reform doesn’t directly affect these, but the interplay needs analysis.
Non-cash donations. Appreciated asset donations, art, real estate, and other non-cash gifts have their own valuation challenges that intersect with the Lifetime Gains Framework’s realization rules.

Revenue Impact

The current charitable deduction costs the Treasury roughly $50-60 billion per year. Replacing it with a capped credit would recover a significant portion of this, depending on credit calibration and behavioral response. Preliminary estimates suggest net revenue savings of $20-40 billion annually, though charitable giving levels may decline modestly in response to the reduced tax benefit for high-income donors.

Relationship to Other Proposals

Lifetime Gains Framework: The realization-at-donation tension is the core design question. The capital gains essay defers this issue to this companion proposal.
Income tax reform: Eliminating the charitable deduction is part of the broader deduction elimination. The credit replaces it.
Professor Ray Madoff’s work: The Second Estate documents how charitable giving structures have become tax avoidance vehicles. This proposal draws on that analysis.

This proposal is part of the Fair and Simple Tax Act. All policy positions are the author’s own.