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Efficiency-Inducing Tax Credits for Charitable Donations when Taxpayers Have Heterogeneous Behavioral Norms

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  • Ngo Van Long

Abstract

We consider an economy in which some taxpayers behave in a Kantian way in their donation behavior while others are Nash players. A Kantian taxpayer holds the norm that any suggested deviation from a proposed equilibrium profile would be adopted by him only if when all members of their community adopted the same deviation, they would all achieve a higher level of welfare. In contrast, a Nash player follows the individual rationality criterion: He would deviate if, assuming all others do not deviate, he would improve his own payoff. We show that if all taxpayers are Nash players, then there is an efficiency-inducing tax credit scheme for charitable contributions. In contrast, if all taxpayers are Kantian, the optimal tax credit for charity is zero. If both types of taxpayers co-exist, and the government does not know who is of what type, then it is not possible for the government to induce the first-best outcome, but it must rely on a second-best tax-credit scheme.

Suggested Citation

  • Ngo Van Long, 2021. "Efficiency-Inducing Tax Credits for Charitable Donations when Taxpayers Have Heterogeneous Behavioral Norms," CESifo Working Paper Series 9414, CESifo.
    • Handle: RePEc:ces:ceswps:_9414
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    References listed on IDEAS

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    1. Laffont, Jean-Jacques, 1975. "Macroeconomic Constraints, Economic Efficiency and Ethics: An Introduction to Kantian Economics," Economica, London School of Economics and Political Science, vol. 42(168), pages 430-437, November.
    2. Pierre von Mouche & Federico Quartieri (ed.), 2016. "Equilibrium Theory for Cournot Oligopolies and Related Games," Springer Series in Game Theory, Springer, number 978-3-319-29254-0, March.
    3. Roemer, John E., 2015. "Kantian optimization: A microfoundation for cooperation," Journal of Public Economics, Elsevier, vol. 127(C), pages 45-57.
    4. Grafton, R. Quentin & Kompas, Tom & Long, Ngo Van, 2017. "A brave new world? Kantian–Nashian interaction and the dynamics of global climate change mitigation," European Economic Review, Elsevier, vol. 99(C), pages 31-42.
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    More about this item

    Keywords

    categorical imperative; Kantian behaviour; Kantian equilibrium; Kant-Nash equilibrium; voluntary contributions to a public good; tax credits;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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