Is Charitable Giving by the Rich Really Responsive to the Income Tax?
US Department of the Treasury - Office of Tax Analysis
October 10, 2011
The income tax deduction for charitable contributions is limited to a fraction of reported income. Consequently, some of the contributions by large donors are not deductible in the year of the transfer, if deductible at all. Because this limit is often ignored in the empirical literature on charitable giving, the tax rate (the implicit subsidy rate) is often measured with error and this may bias estimates of the effects of the tax deduction. In addition to the errors in measuring the tax price, income and the size of gifts are also potentially measured with error; the deduction for contributions is often employed as the measure of transfers when using administrative records even though the amount contributed can be much larger, and income is often understated as the embedded accrued gains in gifts of appreciated assets are overlooked. This paper reviews the key features of the tax treatment of charitable gifts by individuals and employs panel data to explore the sensitivity of behavioral responses to taxes when measurement errors are corrected. The empirical findings suggest that giving by the rich may not be as responsive to the income tax as previously thought.
Number of Pages in PDF File: 20
Keywords: Charitable Giving, Income Taxes, Errors in Variables
JEL Classification: H24, H31, D12
Date posted: November 2, 2011