How Do Nonprofit Firms Respond to Tax Policy?
48 Pages Posted: 31 May 2014 Last revised: 30 Jan 2016
Date Written: November 29, 2015
We investigate the effects of variations in the value of the charitable contribution deduction on nonprofit firm behavior, including exploring for the first time the effects of the tax-price of giving on fundraising. We find that a one-percent increase in tax subsidies is correlated with a 2.0-percent increase in fundraising, while the elasticity of real charitable output to changes in tax price is less than one in absolute value for most firms. We derive a new equation for treasury efficiency in the presence of fundraising, and find that while our point estimates still support treasury efficiency, our confidence intervals are wide enough to allow some possibility that the deduction is not cost effective. Further, the modest elasticity of charitable output to tax price implies that tax subsidies can crowd out other revenue sources, such that the efficacy of the subsidy depends on the relative efficiency of these alternative sources.
Keywords: nonprofits, charitable contribution deduction, price elasticity of giving, fundraising, tax expenditures
JEL Classification: H24, K34, L31
Suggested Citation: Suggested Citation