More Giving or More Givers? The Effects of Tax Incentives on Charitable Donations in the UK

Abstract

This paper estimates the tax-price elasticity of giving using UK administrative tax return data, exploiting variation from a large tax reform. We estimate both the intensive and extensive-margin elasticity, using a novel instrumental variables strategy. Then, we derive new conditions to evaluate the welfare consequences of changes in the generosity of the subsidy to donations. We find a small intensive-margin elasticity of -0.2 and a substantial extensive-margin elasticity of -0.8, yielding a total elasticity of about -1. These estimates mask considerable heterogeneity: high-income individuals respond more on the intensive margin, while the extensive-margin response is stronger among low-income taxpayers.

Keywords: Donations, Tax policy, Tax Subsidies for Giving

JEL Classification: D64, H24, H31