Working Paper: CEPR ID: DP7760
Authors: Kimberley Ann Scharf; Sarah L. Smith
Abstract: Recent evidence suggests that individuals do not always take notice of tax attributes when making their choices. This paper focuses on the case of tax relief for charitable contributions. Although a fully rational donor should view a matched payment to the receiving charity and a tax rebate of the same value as being fully equivalent, evidence from a survey shows that nominal donations are significantly more likely to adjust in response to a change in the tax rebate than to a corresponding change in the match. The patterns of responses across different donors that emerge from the survey cannot be readily explained by the presence of administrative costs or differential warm-glow effects, nor from the match being a more "shrouded" attribute in comparison with the rebate. Rather, we argue that these patterns are consistent with the predictions of a model of rational inattention, whereby a majority of individuals deliberately choose to process changes in the rebate while forgoing to process changes in the match.
Keywords: Rational Inattention; Salience; Subsidies for Giving; Tax Incentives
JEL Codes: D0; D8; H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax rebate (H20) | donation levels (D64) |
| tax match (H26) | donation levels (D64) |
| donor size (F35) | responsiveness to tax incentives (H32) |
| rational inattention (D80) | neglect of tax match (H26) |