Working Paper: NBER ID: w31752
Authors: Louis Kaplow
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: No keywords provided
JEL Codes: D64; H21; H22; H24; H41; K34; L38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal subsidy for charitable giving (D64) | magnitude of the positive externality generated by the giving itself (D64) |
| tax treatment of charitable contributions (D64) | external benefits that arise from charitable acts (D64) |
| distributive effects of subsidizing charitable giving on donors (H23) | separation of these effects from the actual benefits received by charitable beneficiaries (D64) |
| elasticity of charitable giving with respect to the net-of-tax cost (D64) | broader implications of charitable acts on social welfare (D64) |
| ultimate effects of charitable giving on beneficiaries (D64) | understanding of the optimal tax treatment of charitable giving (D64) |