On the Desirability of Taxing Charitable Contributions (original) (raw)
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The Signaling Role of Charitable Contributions by Businesses: A Tax Policy Perspective
SSRN Electronic Journal, 2016
Empirical evidence suggests that charitable contributions to public goods may be driven not only by the familiar warm-glow of giving motive but also as a means for businesses to signal high product quality. Building on this finding, we present an analytical framework that characterizes the optimal government policy, assuming that the government may either directly provide the public good or subsidize its private provision. We show that in the optimal solution the government should subsidize the private provision of the public good and refrain from direct provision. We further demonstrate that the optimal degree of subsidization should decrease with the extent to which the signal is informative, and may even turn into a tax when the signal is sufficiently strong. Finally, we compare the current practice in the US, a charitable contribution deduction provided by Section 170 of the US Tax Code, with the optimal design suggested by our normative analysis and offer changes that would bring the Section closer to the social optimum.
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SSRN Electronic Journal, 2019
In light of the increasing inequality in many countries, this paper analyzes redistributive charitable giving from the rich to the poor in a model of optimal nonlinear income taxation. Our framework integrates (i) public and private redistribution, (ii) the warm glow of giving and stigma of receiving charitable donations, and (iii) status concerns emanating from social comparisons with respect to charitable donations and private consumption. Whether charity should be taxed or supported largely depends on the relative strengths of the warm glow of giving and the stigma of receiving charity, respectively, and on the positional externalities caused by charitable donations. In addition, imposing stigma on the mimicker (which relaxes the self-selection constraint) strengthens the case for subsidizing charity. We also consider a case where the government is unable to target the charitable giving through a direct tax instrument, and we examine how the optimal marginal income tax structure should be adjusted in response to charitable giving. Numerical simulations demonstrate that the quantitative effects of the aforementioned mechanisms can be substantial.
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This paper deals with tax policy responses to charitable giving based on a model of optimal redistributive income taxation. The major contribution is the simultaneous treatment of (i) warm-glow and stigma effects of charitable donations; (ii) that the warm glow of giving and stigma of receiving charity may to some extent depend on relative comparisons; and (iii) that people are also concerned with their relative consumption more generally. Whether charity should be taxed or supported turns out to largely depend on the relative strengths of the warm glow of giving and the stigma of receiving charity, respectively, and on the positional externalities caused by charitable donations. In addition, imposing stigma on the mimicker (via a relaxation of the self-selection constraint) strengthens the case for subsidizing charity. We also consider a case where the government is unable to target the charitable giving through a direct tax instrument, and examine how the optimal marginal income tax structure is adjusted in response to charitable giving.
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This paper analyzes optimal taxation of charitable giving to a public good in a Mirrleesian framework with social comparisons. Leisure separability together with zero transaction costs of giving imply that charitable giving should be subsidized to such an extent that governmental contributions are completely crowded out, regardless of whether the government acknowledges warm glows of giving. Stronger concerns for relative charitable giving and larger transaction costs support lower marginal subsidies, whereas relative consumption concerns work in the other direction. A dual screening approach, where charitable giving constitutes an indicator of wealth, is also presents. Numerical simulations supplement the theoretical results.
The Charitable Contribution Deduction: A Politico-Economic Analysis
1986
Policy analysis of the charitable contribution deduction has focused on two aspects. First, the deduction gives a larger subsidy to high-income individuals, Second, the activities subsidized are often public goods or create positive externalities. The focus on those two traits has led some economists to test the deduction using traditional cost allocation criteria for public goods such as Lindahl equilibrium. A leading paper finds that a tax credit better approximates the Lindahl criteria than a deduction. This paper shows that the opposite may be true if the taxes raised to fu nd the revenue loss from the deduction are even slightly progressive. This finding suggests that the deduction may be a political bargain out come that benefits a wide range of groups. The second part of this paper discusses qualitatively how a political bargain theory can explain the role chosen for the deduction in con junction with other methods of subsidy and direct government provision.
The Effect of Status on Charitable Giving
Journal of Public Economic Theory, 2010
Fundraisers often start their campaigns by soliciting the wealthier, more recognized, and respected individuals in a community. We examine whether the success of this solicitation ordering in part can be attributed to the fact that it enables individuals to select organizations that have a high-status donor base. Assuming that individuals prefer to associate with individuals of higher social ranking we use a simple linear model to show that both aggregate donations and earnings are larger when high-status donors are solicited first. We investigate the predicted comparative statics using the experimental laboratory. Inducing a status differential we reverse the contribution ordering between participants of high and low status. Consistent with current fundraising practice, we find that low-status followers are likely to mimic donations by high-status leaders and this encourages high-status leaders to give. Donations are therefore larger when individuals of high status give before rather than after those of low status.
Charity, Status, and Optimal Taxation: Welfarist and Paternalist Approaches
SSRN Electronic Journal, 2019
This paper deals with tax policy responses to charitable giving, defined in terms of voluntary contributions to a public good, to which the government also contributes through public revenue; the set of tax instruments contains general, nonlinear taxes on income and charitable giving. In addition to consumption, leisure and a public good, individuals obtain utility from the warm glow of giving and social status generated by their relative contributions to charity as well as their relative consumption compared with others. We analyze the conditions under which it is optimal to tax or subsidize charitable giving and derive corresponding optimal policy rules. Another aim of the paper is to compare the optimal tax policy and public good provision by a conventional welfarist government with those by two kinds of paternalist governments: The first kind does not respect the consumer preferences for status in terms of relative giving and relative consumption, while the second kind in addition does not respect preferences for warm glow of giving. The optimal policy rules for marginal taxation and public good provision are similar across governments, except for the stronger incentive to tax charitable giving at the margin under the more extensive kind of paternalism. Numerical simulations supplement the theoretical results.
SSRN Electronic Journal, 2000
The charitable deduction has enjoyed relatively little support in the legal academy. Many commentators have asked what it adds to the tax system and, as critics have observed, the deduction obviously does not itself collect tax revenue. Defenders respond that the deduction helps measure income and keeps taxpayers from inefficiently substituting leisure for work, but these points are, of course, contested. Instead of revisiting debates about what the deduction adds to the tax system, this Article focuses on the broader question of what it adds to the pursuit of public goals. The deductionand any other government subsidy that matches charitable contributions through the tax system (here called "subsidized charity") -enlists private individuals to pursue public goals in a somewhat unique manner. While in other settings the government delegates implementation but still specifies the goal to be pursued, charitable donors are allowed to select the goal as well. Is it desirable to pursue public goals in this way?
How Charitable Is the Charitable Contribution Deduction?
Theoretical Inquiries in Law, 2017
Section 170 of the U.S. Internal Revenue Code is known as the “charitable contribution deduction.” This Article explores the section’s rationale as well as its effect on income/wealth distribution. It reaches the conclusion that the deduction can be justified on efficiency (mitigating the free-riding on public goods and asymmetric information problems) and democracy grounds, but is not “charitable,” as its distributive effects are neutral or even regressive.