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Errors in Variables and Estimated Price Elasticities for Charitable Giving

Researchers often rely on self-reported tax data to gauge the effect of taxes on an economic activity. Such data are subject to measurement errors when individuals intentionally misreport their attributes for tax purposes. To the extent that these intentional reporting errors vary with the tax price and after-tax income, which are important regressors in tax price models, estimated elasticities may be biased. We examine the effect of intentional errors-in-variables in tax price models with an application to charitable giving. We employ a random sample of tax returns subject to extensive audits in order to gauge the magnitude of this potential bias. When the theoretically correct measures of the regressors are used the estimated price elasticity of giving is considerably larger, and the income elasticity is somewhat smaller than conventional estimates using self-reported data. We also find evidence of simultaneity between giving and unreported income. Then, we evaluate the efficacy of using a measure of skewness of the distribution of income (third moment) observed in cross-sectional data as an instrument for the mismeasured variant. We find that this instrument performs reasonably well. Based on this finding, we propose a method to diagnose whether the estimates are subject to measurement error bias and a methodology employing Two-Stage Least Squares to obtain unbiased estimates.

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File URL: http://icepp.gsu.edu/files/2015/03/ispwp0307.pdf
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Paper provided by International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University in its series International Center for Public Policy Working Paper Series, at AYSPS, GSU with number paper0307.

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Length: 39 pages
Date of creation: 01 Mar 2003
Date of revision:
Handle: RePEc:ays:ispwps:paper0307
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Web page: http://aysps.gsu.edu/isp/index.html

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  1. Andreoni, J. & Erard, B. & Feinstein, J., 1996. "Tax Compliance," Working papers 9610r, Wisconsin Madison - Social Systems.
  2. Clotfelter, Charles T., 1985. "Federal Tax Policy and Charitable Giving," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226110486.
  3. Clotfelter, Charles T, 1983. "Tax Evasion and Tax Rates: An Analysis of Individual Returns," The Review of Economics and Statistics, MIT Press, vol. 65(3), pages 363-73, August.
  4. Joel Slemrod, 1998. "A General Model of the Behavioral Response to Taxation," NBER Working Papers 6582, National Bureau of Economic Research, Inc.
  5. Poterba, James M & Summers, Lawrence H, 1995. "Unemployment Benefits and Labor Market Transitions: A Multinomial Logit Model with Errors in Classification," The Review of Economics and Statistics, MIT Press, vol. 77(2), pages 207-16, May.
  6. Joulfaian, David & Rider, Mark, 1996. "Tax Evasion in the Presence of Negative Income Tax Rates," National Tax Journal, National Tax Association, vol. 49(4), pages 553-70, December.
  7. Jonathan S. Feinstein, 1991. "An Econometric Analysis of Income Tax Evasion and its Detection," RAND Journal of Economics, The RAND Corporation, vol. 22(1), pages 14-35, Spring.
  8. Auten, Gerald E & Clotfelter, Charles T, 1982. "Permanent versus Transitory Tax Effects and the Realization of Capital Gains," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 613-32, November.
  9. Arthur Lewbel, 1997. "Constructing Instruments for Regressions with Measurement Error when no Additional Data are Available, with an Application to Patents and R&D," Econometrica, Econometric Society, vol. 65(5), pages 1201-1214, September.
  10. Feldstein, Martin S & Taylor, Amy, 1976. "The Income Tax and Charitable Contributions," Econometrica, Econometric Society, vol. 44(6), pages 1201-22, November.
  11. Gerald E. Auten & Holger Sieg & Charles T. Clotfelter, 2002. "Charitable Giving, Income, and Taxes: An Analysis of Panel Data," American Economic Review, American Economic Association, vol. 92(1), pages 371-382, March.
  12. Auten, Gerald & Joulfaian, David, 1996. "Charitable contributions and intergenerational transfers," Journal of Public Economics, Elsevier, vol. 59(1), pages 55-68, January.
  13. Randolph, William C, 1995. "Dynamic Income, Progressive Taxes, and the Timing of Charitable Contributions," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 709-38, August.
  14. Burman, Leonard E & Randolph, William C, 1994. "Measuring Permanent Responses to Capital-Gains Tax Changes in Panel Data," American Economic Review, American Economic Association, vol. 84(4), pages 794-809, September.
  15. Slemrod, Joel, 1989. "Are Estimated Tax Elasticities Really Just Tax Evasion Elasticities? The Case of Charitable Contributions," The Review of Economics and Statistics, MIT Press, vol. 71(3), pages 517-22, August.
  16. Feldstein, Martin & Clotfelter, Charles, 1976. "Tax incentives and charitable contributions in the United States : A microeconometric analysis," Journal of Public Economics, Elsevier, vol. 5(1-2), pages 1-26.
  17. Charles T. Clotfelter, 1985. "Federal Tax Policy and Charitable Giving," NBER Books, National Bureau of Economic Research, Inc, number clot85-1, June.
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