Optimal Income Taxation and Charitable Giving

Louis Kaplow

No 31752, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The philanthropic sector is highly consequential, particularly in the United States, and the most important policies directed toward this sector are tax policies. Yet most economic analysis of the optimal tax treatment of charitable giving is ad hoc, treating it as a subject unto itself. This article advances a different approach: integrating the tax treatment of charitable giving into the optimal income tax framework that has been developed over the past half century. The results supplement or overturn conventional wisdom. Notably, the analysis of revenue effects and the purported efficiency of subsidies to charitable giving is recast, focusing on the pertinent externalities rather than the direct revenue costs, which themselves are irrelevant in the basic case. Distributive concerns regarding donors are also misplaced because distributive effects can be offset by tax rate adjustments to the broader income tax and transfer system. These ideas are developed systematically, with an emphasis on intuition rather than technical formalism. The analysis also broadens and deepens the assessment of externalities from charitable giving, which are more numerous and heterogeneous than is generally recognized. Finally, refocusing our understanding of the optimal tax treatment of charitable giving identifies important subjects requiring further research.

JEL-codes: D64 H21 H22 H24 H41 K34 L38 (search for similar items in EconPapers)
Date: 2023-10
New Economics Papers: this item is included in nep-pbe and nep-pub
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Published as Optimal Income Taxation and Charitable Giving , Louis Kaplow. in Tax Policy and the Economy, Volume 38 , Moffitt. 2024

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