How Does Charitable Giving Respond to Incentives and Income? Dynamic Panel Estimates Accounting for Predictable Changes in Taxation

64 Pages Posted: 18 Aug 2008 Last revised: 5 Sep 2008

See all articles by Jon Bakija

Jon Bakija

Williams College - Department of Economics

Bradley T. Heim

U.S. Department of the Treasury

Date Written: August 2008

Abstract

We estimate the elasticity of charitable giving with respect to its price and after-tax income using a panel of over 550,000 disproportionately high-income tax returns spanning the years 1979 through 2005. Improvements relative to the previous literature include: using state tax variation to help identify our model while controlling for both individual- and time-specific unobserved heterogeneity; carefully dealing with expectations; allowing people at different income levels to have different degrees responsiveness to taxation and different time paths of unobservable influences on giving; and using a measure of charitable giving that more closely approximates current donations. To address the omitted variable bias that would otherwise arise from failing to control for unobservable expectations of future prices and future incomes, we use predictable changes in future federal and state marginal tax rates and tax liabilities, arising from their pre-announced and phased-in nature, as instruments for future changes in prices and income. Our estimate of the elasticity of giving with respect to a persistent price change for the full sample is about -0.7; this elasticity is generally larger when the sample is limited to high-income people and we control for time-varying unobservable influences on charity in a flexible fashion. We find some evidence, particularly among very high-income people, of re-timing giving in response to expected future changes in price, but this finding is sensitive to the source of identification for the price effects. Our estimates are broadly consistent the permanent income hypothesis. Expenditures on charitable giving are estimated to respond more strongly to persistent changes in income than to transitory fluctuations in income. Moreover, we find evidence in some specifications that people will increase their charitable giving now in response to a predictable reduction in future tax liability arising from tax reform.

Suggested Citation

Bakija, Jon and Heim, Bradley T., How Does Charitable Giving Respond to Incentives and Income? Dynamic Panel Estimates Accounting for Predictable Changes in Taxation (August 2008). NBER Working Paper No. w14237. Available at SSRN: https://ssrn.com/abstract=1230859

Jon Bakija (Contact Author)

Williams College - Department of Economics ( email )

Morey House
Williamstown, MA 01267
United States

Bradley T. Heim

U.S. Department of the Treasury ( email )

1500 Pennsylvania Avenue, NW
Washington, DC 20220
United States

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