Inventory Planning and Tax Incentives for Charitable Giving

Abstract

Many of America’s top corporate donors share a common feature: the bulk of their giving is in the form of in-kind products, not cash. This phenomenon is not a coincidence but rather a result of the tax code creating such a preference due to an “enhanced” deduction for inventory donations. In this paper, we examine a model of inventory choice under uncertainty and demonstrate that enhanced tax deductions not only promote giving, they also notably influence inventory planning and accelerate learning of customer demand. We then show how enhanced deductions serve as a robust means through which socially-optimal inventory stocking decisions can be implemented. Besides effectively aligning priorities of the firm with those of the social planner in each period, the implementing approach gives credence to tax deductions seen in practice in that the mechanism specifies deductions that exceed the taxpayer’s standard cost basis.

Keywords: charitable giving; corporate philanthropy; enhanced tax deductions; inventory; taxation

JEL Classification: D21, H21, H25, L31, M40