Efficiency-Inducing Tax Credits for Charitable Donations when Taxpayers Have Heterogeneous Behavioral Norms

Ngo Long

No 9414, CESifo Working Paper Series from CESifo

Abstract: We consider an economy in which some taxpayers behave in a Kantian way in their donation behavior while others are Nash players. A Kantian taxpayer holds the norm that any suggested deviation from a proposed equilibrium profile would be adopted by him only if when all members of their community adopted the same deviation, they would all achieve a higher level of welfare. In contrast, a Nash player follows the individual rationality criterion: He would deviate if, assuming all others do not deviate, he would improve his own payoff. We show that if all taxpayers are Nash players, then there is an efficiency-inducing tax credit scheme for charitable contributions. In contrast, if all taxpayers are Kantian, the optimal tax credit for charity is zero. If both types of taxpayers co-exist, and the government does not know who is of what type, then it is not possible for the government to induce the first-best outcome, but it must rely on a second-best tax-credit scheme.

Keywords: categorical imperative; Kantian behaviour; Kantian equilibrium; Kant-Nash equilibrium; voluntary contributions to a public good; tax credits (search for similar items in EconPapers)
JEL-codes: H21 H31 H41 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-gth, nep-mic, nep-pbe and nep-pub
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Working Paper: Efficiency-inducing tax credits for charitable donations when taxpayers have heterogeneous behavioral norms (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9414

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