Does the Incentive Effect of the Charitable Deduction Vary Across Charities?

Abstract:     
We examine how taxes affect the amounts of donations given to charities and, in particular, how the sensitivity of donations to taxes varies across different types of charities. Prior studies generally constrained tax price elasticities to be constant across charities not by choice, but rather by empirical necessity, as the data used in those studies (i.e., individual income tax returns) do not break out donations by type of charity. Unlike prior studies, which estimated the tax price elasticity of donations given, we use charity-level data to estimate the tax price elasticity of donations received. We find significant differences in the response of donations to taxes across different types of charities. Donations to charities that provide basic goods and services to humans in need appear to be unresponsive to tax incentives, while donations to charities that appeal to higher human needs, animals, and the environment are very sensitive to tax incentives. These results suggest that changes to tax laws that affect the price of giving would likely lead to a reallocation of relative donations across different types of charities.

Keywords: tax incentives, charitable deduction, nonprofit organizations, charities

JEL Classifications: H2, H4, H7, L3, K34

Working Paper Series