Taxing and Subsidising Charitable Contributions

Alan Krause

Discussion Papers from Department of Economics, University of York

Abstract: This paper examines a model of charitable contributions in which there exist both warm-glow and public good motives for giving, but where the warm-glow motive is competitive in the sense that individuals evaluate their own contribution relative to that of their peers. In this setting, it is shown that tax-financed charitable contributions by the government completely crowd out private contributions as the competitive element of the warm-glow motive intensifies. This implies that the warm-glow assumption may not be the best way of explaining the empirical evidence on incomplete crowding out. It is also shown that the tax-deductibility of charitable contributions acts to strengthen the crowding-out effect, and that it can be optimal to tax charitable contributions.

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