Optimal Income Taxation and Charitable Giving

Forthcoming, Tax Policy and the Economy, Volume 38, Robert Moffitt, ed. (2024)

36 Pages Posted: 28 Oct 2023

See all articles by Louis Kaplow

Louis Kaplow

Harvard Law School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 29, 2023

Abstract

The philanthropic sector is highly consequential, particularly in the United States, and the most important policies directed toward this sector are tax policies. Yet most economic analysis of the optimal tax treatment of charitable giving is ad hoc, treating it as a subject unto itself. This article advances a different approach: integrating the tax treatment of charitable giving into the optimal income tax framework that has been developed over the past half century. The results supplement or overturn conventional wisdom. Notably, the analysis of revenue effects and the purported efficiency of subsidies to charitable giving is recast, focusing on the pertinent externalities rather than the direct revenue costs, which themselves are irrelevant in the basic case. Distributive concerns regarding donors are also misplaced because distributive effects can be offset by tax rate adjustments to the broader income tax and transfer system. These ideas are developed systematically, with an emphasis on intuition rather than technical formalism. The analysis also broadens and deepens the assessment of externalities from charitable giving, which are more numerous and heterogeneous than is generally recognized. Finally, refocusing our understanding of the optimal tax treatment of charitable giving identifies important subjects requiring further research.

Keywords: optimal income taxation, charitable contributions, philanthropy

JEL Classification: D64, H21, H22, H23, H24, H41, K34, L38

Suggested Citation

Kaplow, Louis, Optimal Income Taxation and Charitable Giving (September 29, 2023). Forthcoming, Tax Policy and the Economy, Volume 38, Robert Moffitt, ed. (2024), Available at SSRN: https://ssrn.com/abstract=4587988 or http://dx.doi.org/10.2139/ssrn.4587988

Louis Kaplow (Contact Author)

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