Sweet and Not-So-Sweet Charity

Abstract

In order to maximize social welfare, governments should subsidize at different rates the private contributions made to different categories of charitable or publicly beneficial civic activity. This prescription stands in contrast to the standard practice of subsidizing such contributions uniformly and suggests the need to evaluate not only that practice but also the diverse initiatives of several governments to subsidize at higher rates certain contributions made to certain categories. The case for differential subsidies is made here with reference to a model in which the government chooses the subsidies and amounts of direct funding, as well as a personal transfer and linear taxes on earnings and consumption. The categories differ in terms of the individuals contributing, the individuals receiving the charitable goods and services, and the effectiveness of direct funding relative to contributions. A linear expenditure system illustrates the restrictive conditions necessary for uniform contribution subsidies being optimal.