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

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