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

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  • Ryo Ishida

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    (Policy Research Institute, the Ministry of Finance, Japan)

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    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 givingh 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 givingh 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 gtrueh 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.

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    File URL: http://www.mof.go.jp/pri/research/discussion_paper/ron234.pdf
    File Function: First version, 2012
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    Bibliographic Info

    Paper provided by Policy Research Institute, Ministry of Finance Japan in its series Discussion papers with number ron234.

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    Length: 28 pages
    Date of creation: May 2012
    Date of revision: Jun 2012
    Handle: RePEc:mof:wpaper:ron234

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    Web page: http://www.mof.go.jp/pri/
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    Related research

    Keywords: Public Good; Tax Credit; Lobbying; Decentralization;

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    1. Dean Karlan & John A. List, 2006. "Does Price Matter in Charitable Giving? Evidence from a Large-Scale Natural Field Experiment," Working Papers 1, The Field Experiments Website.
    2. Glenn Harrison & John List, 2004. "Field experiments," Artefactual Field Experiments 00058, The Field Experiments Website.
    3. Bombardini, Matilde, 2008. "Firm heterogeneity and lobby participation," Journal of International Economics, Elsevier, vol. 75(2), pages 329-348, July.
    4. Assar Lindbeck & J├Ârgen Weibull, 1987. "Balanced-budget redistribution as the outcome of political competition," Public Choice, Springer, vol. 52(3), pages 273-297, January.
    5. Charles T. Clotfelter, 1985. "Federal Tax Policy and Charitable Giving," NBER Books, National Bureau of Economic Research, Inc, number clot85-1, October.
    6. Clotfelter, Charles T., 1985. "Federal Tax Policy and Charitable Giving," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226110486, September.
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