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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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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Find related papers by JEL classification:
  • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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Cited by:

  1. Bönke, Timm & Werdt, Clive, 2015. "Charitable giving and its persistent and transitory reactions to changes in tax incentives: Evidence from the German taxpayer panel," Discussion Papers 2015/2, Free University Berlin, School of Business & Economics.
  2. Bakija, Jon & Heim, Bradley T., 2011. "How Does Charitable Giving Respond To Incentives And Income? New Estimates From Panel Data," National Tax Journal, National Tax Association, vol. 64(2), pages 615-50, June.
  3. Seth H. Giertz, 2004. "Recent Literature on Taxable-Income Elasticities: Technical Paper 2004-16," Working Papers 16189, Congressional Budget Office.
  4. 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.
  5. 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.
  6. 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.
  7. Scharf, Kimberley, 2014. "Impure prosocial motivation in charity provision: Warm-glow charities and implications for public funding," Journal of Public Economics, Elsevier, vol. 114(C), pages 50-57.
  8. Alan Krause, . "Taxing and Subsidising Charitable Contributions," Discussion Papers 09/23, Department of Economics, University of York.
  9. Peter Diamond & Emmanuel Saez, 2011. "The Case for a Progressive Tax: From Basic Research to Policy Recommendations," Journal of Economic Perspectives, American Economic Association, vol. 25(4), pages 165-90, Fall.
  10. Ryta I. Dziemianowicz & Adam Wyszkowski & Renata Budlewska, 2014. "Tax expenditures jako ukryta forma wydatków publicznych," Gospodarka Narodowa, Warsaw School of Economics, issue 3, pages 35-62.
  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. Bönke, Timm & Massarrat-Mashhadi, Nima & Sielaff, Christian, 2010. "Charitable giving in the German welfare state: Fiscal incentives and crowding out," Discussion Papers 2010/30, Free University Berlin, School of Business & Economics.
  13. Doerrenberg, Philipp & Peichl, Andreas & Siegloch, Sebastian, 2014. "Sufficient statistic or not? The elasticity of taxable income in the presence of deduction possibilities," ZEW Discussion Papers 14-078, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  14. 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.
  15. 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.
  16. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
  17. 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.).

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