How sensitive is the average taxpayer to changes in the tax-price of giving?

Abstract

There is a substantial literature estimating the responsiveness of charitable donations to tax incentives for giving in the USA. One approach estimates the price elasticity of giving based on tax return data of individuals who itemize their deductions, a group substantially wealthier than the average taxpayer. Another estimates the price elasticity for the average taxpayer based on general population survey data. Broadly, results from both arms of the literature present a counterintuitive conclusion: the price elasticity of donations of the average taxpayer is larger than that of the average, wealthier, itemizer. We provide theoretical and empirical evidence that this conclusion results from a heretofore unrecognized downward bias in the estimator of the price elasticity of giving when non-itemizers are included in the estimation sample (generally with survey data). An intuitive modification to the standard model used in the literature is shown to yield a consistent and more efficient estimator of the price elasticity for the average taxpayer under a testable restriction. Strong empirical support is found for this restriction, and we estimate a bias in the price elasticity around − 1, suggesting the existing literature significantly over-estimates (in absolute value) the price elasticity of giving. Our results provide evidence of an inelastic price elasticity for the average taxpayer, with a statistically significant and elastic price response found only for households in the top decile of income.

Tax Prices and Charitable Giving: Projected Changes in Donations Under the 2017 TCJA

“…We also remove the low income Survey of Economic Opportunity (SEO) oversample and the 2017 Immigrant Refresher. 9 Consistent with prior literature on tax price elasticities, we omit households that are "endogenous itemizers" -those who would not itemize if they had zero charitable contributions (Clotfelter, 1980;Backus and Grant, 2019;Ottoni-Wilhelm and Hungerman, 2007). These households are more likely to be making the decisions of whether to itemize and how much to donate simultaneously; their inclusion in the estimation makes elasticities appear larger in magnitude than they are in reality.…”

“…Accounting for differences in behavior by switchers and always-itemizers is a matter of some contention (Backus and Grant, 2019). We follow Ottoni- Wilhelm and Hungerman (2007) and divide the sample into households who always itemize and households that switch itemizing status over the sample period in Table 4.…”

“…See Ottoni-Wilhelm and Hungerman (2007),Auten, Sieg, Clotfelter (2002),Backus and Grant (2019), among many others.16 About 5 percent of the sample has a zero-dollar tax price that differs from its actual tax price. This is not an uncommon issue in this literature, as discussed byBackus and Grant (2019).17 Reported and calculated itemization status agree for 80 percent of observations in our sample. 15 percent report itemizing when we calculate that they shouldn't have and 5 percent report not itemizing when they should have Benzarti (2019).…”

The Routledge Handbook of Taxation and Philanthropy

“…55 Following this approach, specific DTCs, following the approach of the U.S. Model, entail a provision providing that exempt charitable entities are regarded as resident. This is the case, for example, of many treaties concluded by the United States, 56 such as, inter alia, the U.S. treaties with the United Kingdom, Australia, Ireland and Switzerland. 57 The United Kingdom also includes specific clauses in many DTCs granting residence to non-profit organizations established in one contracting state.…”

“…Attempts to rank charities as to their relative worthiness based on their purpose and effectiveness of performance face substantial obstacles. 56 These challenges are perhaps unsurprising given both the difficulty of achieving political consensus on what activities are more or less worthy and of assessing the relative efficiency and effectiveness of performance.…”