Charitable giving is a two-step process: you decide whether to make a donation, then decide how much to give. The first step is usually easy, but the second step can be a doozy. The challenge of figuring out how much to donate often stops people in their tracks and can prevent them from giving anything at all. So, how do you figure out the right amount to give?
A Deeply Personal Decision, Driven by Social Norms
Charitable giving is funny - you’re supposed to do it, but not supposed to talk about it. (Unless, of course, you donated enough to put your name on a building or made a pledge in front of everyone at a charity auction.)
When people search for clues about how much to give, they’re told that it’s a “deeply personal decision,” “with no right answer” that they must somehow make on their own. Left to our own devices, we do what we always do to figure out what’s acceptable: look around to see what other people are doing, particularly those with similar incomes and wealth.
This is one reason why there’s so much interest in the charitable deductions on U.S. tax returns. In the absence of other information, the money people claim as a tax deduction seems like a good proxy for what portion of income people are willing to give at different income levels.
The tax-return data is misleading, though. It omits presumably smaller charitable gifts, since historically about two-thirds of taxpayers do not report itemized deductions. The data also includes statistical outliers such as wealthy people with low incomes but significant assets, who make larger-than-average donations for their income group.
As a result, the tax-return data suggests -- incorrectly, according to a working paper published last year by researchers at Texas A&M University -- that lower-income groups give, on average, a far larger portion of their income than higher-income groups. 1 This, in turn, fuels erroneous narratives in the press about how wealthier people are supposedly stingier than less wealthy ones.
Going forward, the tax data will be even less helpful in guessing how much people donate, since recent tax-law changes mean that even fewer people now itemize charitable deductions. So we’ll need to look elsewhere for what’s customary.
Tithing
Why not just follow the ancient precepts for how much to give? There’s plenty of guidance in the Bible that says you should give ten percent of your income -- a “tithe” in Old English -- to charity.
Genesis 28:18-22 records Jacob’s promise to tithe:
If God will be with me and will keep me on this journey that I take, and will give me food to eat and garments to wear, and I return to my father’s house in safety, then the LORD will be my God. This stone, which I have set up as a pillar, will be God’s house, and of all that You give me I will surely give a tenth to You.”
You can also find Biblical references to tithing in Genesis 14:17-24, Leviticus 27:30-33, and Deuteronomy 14:22), among other places, and the Torah tells Jews to give ten percent of their income to charity in the Jewish tradition of tzedakah.
The problem, of course, is that giving ten percent of one’s income is . . . so much.
As a result, most people find it easy to shrug off the applicability of tithing in today’s secular world. After all, Jacob wasn’t subject to state and federal income taxes, Social Security and Medicare tax, or sales tax.
Also, tithing was just an expedient way to divide crops or livestock when society lacked sophisticated financial tools. And perhaps not so expedient:
When Utah was still a territory in the nineteenth century, the Church of Jesus Christ of Latter-Day Saints established a tithing system where everyone gave 10% of their income to the church, usually in livestock or produce, since cash was scarce. While the system worked well in a lot of ways, “[i]t also had problems: Young constantly complained that tithers were giving him ‘the worst of their animals.’”
Finally, isn’t a command to donate a flat 10% of your income, regardless of how much you make, the type of unfair regressive tax that we work so hard to avoid otherwise?
For these and other reasons, you won’t meet many people who regularly give away ten percent of their income each year.
Other Giving Standards
You could repurpose one of the other giving standards. Islam requires giving 2.5% of one’s wealth each year for the poor. Businesses are encouraged to give 1% for the planet, and the United Nations recommends that developed countries target 0.7% for foreign aid.
A better method would be to use the evidence of the Texas A&M researchers, who found that after adjusting for outliers, most households across different income levels gave between 1 to 2% of their income to charity each year:
Figure 6: Percent of Income Given, Winsorized, by Income
Notes: This figure reports, across income bins, the mean percent of income given winsorized at three levels: 10%, 20%, and 30%,. For each of the three levels, the percent of income given by households is capped at that percentage.
These findings contradict earlier studies, based on the problematic tax data, which suggested a U-shaped giving curve across income levels, with middle-income groups donating the smallest amounts of their income and the lower and higher income groups donating more.
Why the difference? Instead of tax-return data, the researchers used data from 10,665 American households collected between 2001 and 2017 from the Panel Study of Income Dynamics, a “biennial household survey that collects information from the previous year on wealth, income, and a rich set of individual and household characteristics.”
They also applied well-established statistical controls to reduce the effect of outliers in the low-income groups such as “elderly households with high levels of wealth but low income” and “non-elderly households with transitorily low income, perhaps through business losses.” (p.6)
After these improvements, the evidence showed that wealthy households were more likely than less wealthy ones to donate to charity. They also donated higher amounts, both in absolute and relative terms.
But interestingly, for our purposes here, the findings showed that the amount donated as a proportion of income across all income levels was essentially flat, falling within a range of 1 to 2% of income, with a general tendency towards 1.5%.
To be sure, an average giving amount of 1.5% is merely a summary statistic that obscures all the variation, the above-and-below average givers, that combined to create it. Also, as noted, it was derived from adjustments that “clipped” the outlier donations that were above the usual amounts. Some of these donations are quite extraordinary such as the $4 billion distributed over a mere four months last year by MacKenzie Scott.
Still, here, if you like, is an easy rule of thumb, or compass, for how much to donate, regardless of how much you make. Not too hot, not too cold, a charitable-giving rule of 1.5% of annual income could be just right.
Like any rule of thumb, though, this percent-of-income standard is a blunt instrument. What’s appropriate for one household might not be workable for another, and what makes sense this year might not be doable the next.
The rule doesn’t account for annual variations in income and expenses, or periodic windfalls from stock compensation or inheritances. It doesn’t help households with large amounts of wealth, but low income, and it fails to make any connection between the means to give and the purpose for doing so.
The rule is thus best used as a starting point. The final determination of an appropriate amount to give will ideally rest upon a thoughtful review of your own finances and charitable goals, and in our next article we’ll discuss how you can tailor the rule to your circumstances.