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The impact of taxes and wasteful government spending on giving

Author

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  • Roman M. Sheremeta

    (Case Western Reserve University
    Chapman University)

  • Neslihan Uler

    (University of Maryland)

Abstract

We examine how taxes impact charitable giving and how this relationship is affected by the degree of wasteful government spending. In our model, individuals make donations to charities knowing that the government collects a flat-rate tax on income (net of charitable donations) and redistributes part of the tax revenue. The rest of the tax revenue is wasted. The model predicts that a higher tax rate increases charitable donations. Surprisingly, the model shows that a higher degree of waste decreases donations (when the elasticity of marginal utility with respect to consumption is high enough). We test the model’s predictions using a laboratory experiment with actual donations to charities and find that the tax rate has an insignificant effect on giving. The degree of waste, however, has a large, negative and highly significant effect on giving.

Suggested Citation

  • Roman M. Sheremeta & Neslihan Uler, 2021. "The impact of taxes and wasteful government spending on giving," Experimental Economics, Springer;Economic Science Association, vol. 24(2), pages 355-386, June.
  • Handle: RePEc:kap:expeco:v:24:y:2021:i:2:d:10.1007_s10683-020-09673-9
    DOI: 10.1007/s10683-020-09673-9
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    More about this item

    Keywords

    Charitable giving; Tax; Waste; Redistribution; Experiment; Public goods provision; Neutrality; Income inequality;
    All these keywords.

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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