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Public goods provision and redistributive taxation

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  • Uler, Neslihan

Abstract

This paper studies the relationship between redistributive taxation and tax-deductible charitable contributions. Redistribution has two opposite effects on voluntary giving. The price of charitable giving decreases with the degree of redistribution, and this has a positive effect on the total amount of giving (substitution effect). However, redistribution leads to lower consumption for the contributors and therefore has a negative effect on contributions to the charity (income effect). The theoretical model developed in this paper demonstrates that, under a general class of utility functions, the substitution effect dominates the income effect. Hence, charitable giving increases with the tax rate. In purely egalitarian societies, the public good is provided efficiently and the total welfare is maximized independent of the ex-ante income inequality. However, the positive impact of taxation on charitable giving and welfare may disappear if individuals generate their income levels in anticipation of taxation and redistribution does not take into account the cost of effort.

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Bibliographic Info

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

Volume (Year): 93 (2009)
Issue (Month): 3-4 (April)
Pages: 440-453

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Handle: RePEc:eee:pubeco:v:93:y:2009:i:3-4:p:440-453

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

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Keywords: Public goods Charitable giving Redistributive taxation Efficient private provision;

References

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Citations

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Cited by:
  1. Corgnet, Brice & Sutan, Angela & Veszteg, Róbert F., 2011. "My teammate, myself and I: Experimental evidence on equity and equality norms," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, Elsevier, vol. 40(4), pages 347-355, August.
  2. Tamai, Toshiki, 2010. "Public goods provision, redistributive taxation, and wealth accumulation," Journal of Public Economics, Elsevier, Elsevier, vol. 94(11-12), pages 1067-1072, December.
  3. Neslihan Uler, 2011. "Public goods provision, inequality and taxes," Experimental Economics, Springer, Springer, vol. 14(3), pages 287-306, September.

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