A Note on the Effects of Taxation on Charitable Giving Over the Life Cycle and Beyond

Abstract

Recent changes in the Federal budget have sparked debate concerning the substitution of charitable activity for some types of government expenditures. The extent to which private replacement is successful depends upon two factors: the ability of charities to substitute their services for those reduced by the government and the ability of charities to garner more contributions as income and estate tax rates are reduced. This analysis will concentrate only on the latter factor. In particular, this analysis will deal with the following questions. Will a reduction in income and estate tax rates have a predictable effect on the level of charitable contributions over the life cycle and the level of charitable bequests? If the reduction in tax rates reduces charitable contributions over the life cycle, will there be an offsetting rise in charitable bequests; that is, will the reduction in tax rates affect only the timing of charitable giving? This question of timing is particularly important, since successful replacement of government programs by charitable activity requires that current contributions rise. The literature dealing with the effects of taxation on charitable giving does provide some information concerning these questions. For example, a number of authors including Feldstein and Clotfelter [1976], Feldstein and Taylor [1976], Schwartz [1970], and Taussig [1967] have measured the impact of the deductibility of charitable contributions under the income tax. Although the effects of the after-tax cost of contributing (one minus the marginal tax in the simplest case) vary widely, the best evidence appears to be given by Feldstein and Clotfelter [1976], who find that the elasticity of charitable contributions with respect to the after-tax cost of giving is around 1.5. Feldstein and Clotfelter also find that the elasticities of contributions with respect to a measure of permanent income and to net worth are both positive. These results imply that reducing income tax rates should result