Charitable Giving and Income Taxation in a Life-Cycle Model: An Analysis of Panel Data

Duke Economics Working Paper No. 99-03

35 Pages Posted: 26 Mar 1999

See all articles by Gerald Auten

Gerald Auten

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

Holger Sieg

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Charles T. Clotfelter

Duke University - Sanford School of Public Policy; Duke University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 14, 1999

Abstract

Recent econometric studies of the effect of taxes on charitable giving have called into question the behavioral parameters derived from cross-section models. In particular, these studies imply that taxes affect contributions primarily by influencing their timing, not their long-term levels. The current paper seeks to address this important policy issue by modeling charitable giving in a life-cycle model, with special reference to the effect of taxes and income. It employs a simple two-step estimator that provides consistent estimates of both persistent and transitory effects of income and prices on charitable giving. We estimate the model using a 12-year panel of individual tax returns collected by the Internal Revenue Service. The empirical findings of this paper indicate that persistent income shocks have substantially larger impacts on charitable behavior than transitory shocks. Additionally, there are substantial effects of persistent changes in the tax prices. Estimates of the elasticity with respect to the persistent component of price range from -0.6 to -1.1. While these are indeed smaller than conventional estimates, they would nevertheless imply that tax reforms have long-lasting effects on giving. We also estimate the variances of both transitory and persistent shocks. Variances of the persistent shocks of incomes and donations are increasing during the observation period, indicating a trend towards more inequality. The variance of persistent price shocks is decreasing, which is probably a direct result of tax reforms which were implemented during the sample period.

JEL Classification: C33, D12, H24

Suggested Citation

Auten, Gerald and Sieg, Holger and Clotfelter, Charles T., Charitable Giving and Income Taxation in a Life-Cycle Model: An Analysis of Panel Data (January 14, 1999). Duke Economics Working Paper No. 99-03. Available at SSRN: https://ssrn.com/abstract=152892 or http://dx.doi.org/10.2139/ssrn.152892

Gerald Auten

U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave., N.W.
Washington, DC 22203
United States

Holger Sieg (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Charles T. Clotfelter

Duke University - Sanford School of Public Policy ( email )

Box 90245
Durham, NC 27708
United States
919-613-7361 (Phone)
919-681-8288 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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