The Effect of Tax Credit on Politically Distorted Allocations: A Theoretical Approach

Ryo Ishida

Discussion papers from Policy Research Institute, Ministry of Finance Japan

Abstract: Many countries have adopted policies to give preferential treatment for voluntary contributions to certain public goods. Taxable deductions, matching subsidies and rebate subsidies, which decrease gthe price of giving h for donors, are prototypical examples. However, the more aggressive policy of tax credit for voluntary contributions to certain public goods which decreases gthe price of giving h to zero, has not been studied so far in detail, although such a policy can be seen in several countries: the Percentage Law in Hungary, Lithuania, Poland, Romania and Slovakia, and the Hometown Tax-payment policy in Japan. In these countries, and especially in Eastern European countries, such a policy is justified because, by decentralizing the power of government, it allows individuals to reveal their gtrue h preferences and thus allows necessary adjustment for distorted government allocations. In this paper, I find that, such a policy has this adjustment effect if, and only if, the size of the tax credit exceeds certain threshold. In other words, such a policy can be totally cancelled out by a lobby-government coalition if its size falls beneath a threshold.

Keywords: Public Good; Tax Credit; Lobbying; Decentralization (search for similar items in EconPapers)
JEL-codes: D72 H23 H41 L30 P16 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2012-05, Revised 2012-06
New Economics Papers: this item is included in nep-pbe and nep-tra
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