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The optimal treatment of tax expenditures

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  • Saez, Emmanuel

Abstract

This paper analyzes the optimal treatment of tax expenditures. It develops an optimal tax model where individuals derive utility from spending on a contribution' good such as charitable giving. The contribution good has also a public good effect on all individuals in the economy. The government imposes linear taxes on earnings and on the contribution good so as to maximize welfare. The government may also finance directly the contribution good out of tax revenue. Optimal tax and subsidy rates on earnings and the contribution good are expressed in terms of empirically estimable parameters and the redistributive tastes of the government. The optimal subsidy on the contribution good is increasing in the size of the price elasticity of contributions, the size of the crowding-out effect of public contributions on private contributions, and the size of the public good effect of the contribution good. Numerical simulations show that the optimal subsidy on contributions is fairly sensitive to the size of these parameters but that, in most cases, it should be lower than the earnings tax rate.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 88 (2004)
Issue (Month): 12 (December)
Pages: 2657-2684

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Handle: RePEc:eee:pubeco:v:88:y:2004:i:12:p:2657-2684

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Web page: http://www.elsevier.com/locate/inca/505578

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  1. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier.
  2. Clotfelter, Charles T., 1985. "Federal Tax Policy and Charitable Giving," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226110486.
  3. Feldstein, Martin, 1995. "Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Scholarly Articles 2766676, Harvard University Department of Economics.
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  16. Andreoni, James, 1990. "Impure Altruism and Donations to Public Goods: A Theory of Warm-Glow Giving?," Economic Journal, Royal Economic Society, vol. 100(401), pages 464-77, June.
  17. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-78, June.
  18. Jon Gruber & Emmanuel Saez, 2000. "The Elasticity of Taxable Income: Evidence and Implications," NBER Working Papers 7512, National Bureau of Economic Research, Inc.
  19. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-72, June.
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Citations

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Cited by:
  1. Emmanuel Saez & Joel B. Slemrod & Seth H. Giertz, 2009. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," NBER Working Papers 15012, National Bureau of Economic Research, Inc.
  2. Scharf, Kimberley, 2013. "Impure Prosocial Motivation in Charity Provision: Warm-Glow Charities and Implications for Public Funding," CEPR Discussion Papers 9749, C.E.P.R. Discussion Papers.
  3. Cordes, Joseph J., 2011. "Re-Thinking The Deduction For Charitable Contributions: Evaluating The Effects Of Deficit-Reduction Proposals," National Tax Journal, National Tax Association, vol. 64(4), pages 1001-24, December.
  4. Peter A. Diamond & Emmanuel Saez, 2011. "The Case for a Progressive Tax: From Basic Research to Policy Recommendations," CESifo Working Paper Series 3548, CESifo Group Munich.
  5. Gabrielle Fack & Camille Landais, 2010. "Are Tax Incentives for Charitable Giving Efficient? Evidence from France," NBER Chapters, in: Income Taxation, Trans-Atlantic Public Economics Seminar (TAPES), pages 117-141 National Bureau of Economic Research, Inc.
  6. Květa Kubátová & Martin Jareš, 2011. "Identification and Quantification of Tax Reliefs in the Czech Republic in the Year 2008," Politická ekonomie, University of Economics, Prague, vol. 2011(4), pages 475-489.
  7. Seth H. Giertz, 2004. "Recent Literature on Taxable-Income Elasticities: Technical Paper 2004-16," Working Papers 16189, Congressional Budget Office.
  8. Timm Bönke & Nima Massarrat-Mashhadi & Christian Sielaff, 2013. "Charitable giving in the German welfare state: fiscal incentives and crowding out," Public Choice, Springer, vol. 154(1), pages 39-58, January.
  9. Jane K. Dokko, 2008. "Does the NEA crowd out private charitable contributions to the arts?," Finance and Economics Discussion Series 2008-10, Board of Governors of the Federal Reserve System (U.S.).
  10. Jon Bakija & Bradley Heim, 2008. "How Does Charitable Giving Respond to Incentives and Income? New Estimates from Panel Data," Department of Economics Working Papers 2008-01, Department of Economics, Williams College, revised Jun 2011.
  11. Jon Bakija, 2013. "Tax Policy and Philanthropy: A Primer on the Evidence for the U.S. and its Implications," Department of Economics Working Papers 2013-01, Department of Economics, Williams College.
  12. Alan Krause, . "Taxing and Subsidising Charitable Contributions," Discussion Papers 09/23, Department of Economics, University of York.
  13. Jon Bakija & Bradley Heim, 2008. "How Does Charitable Giving Respond to Incentives and Income? Dynamic Panel Estimates Accounting for Predictable Changes in Taxation," NBER Working Papers 14237, National Bureau of Economic Research, Inc.
  14. Diamond, Peter, 2006. "Optimal tax treatment of private contributions for public goods with and without warm glow preferences," Journal of Public Economics, Elsevier, vol. 90(4-5), pages 897-919, May.

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