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Simulating Nonlinear Tax Rules and Nonstandard Behavior: An Application to the Tax Treatment of Charitable Contributions

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  • Martin Feldstein
  • Lawrence B. Lindsey

Abstract

This paper examines how the tax simulation method can be extended to incorporate nonlinear budget constraints and nonstandard economic behavior. We simulate the effect of extending the charitable deduction to nonitemizers and study the effect of alternative "floors". The specific simulations indicate that the econometric evidence on charitable giving implies that extending the charitable deduction to nonitemizers would raise individual giving by about 12 percent of the existing total amount or $4.5 billion at 1977 levels. The extension would reduce tax revenue by slightly less, about $4.1 billion. A floor of $300 or 3 percent of AGI would reduce the revenue loss by 30 to 40 percent, even if there is significant bunching. The effect of the floor on increased giving depends critically on whether taxpayers' behavior is guided by conventional demand principles or by the net altruism rule. A reasonable conclusion is that a floor would reduce giving by less than the increased revenue but that the difference between them would not be very large.

Suggested Citation

  • Martin Feldstein & Lawrence B. Lindsey, 1981. "Simulating Nonlinear Tax Rules and Nonstandard Behavior: An Application to the Tax Treatment of Charitable Contributions," NBER Working Papers 0682, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0682
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    References listed on IDEAS

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    1. Clotfelter, Charles T, 1980. "Tax Incentives and Charitable Giving: Evidence from a Panel of Taxpayers," Empirical Economics, Springer, vol. 13(3), pages 319-340, June.
    2. Clotfelter, Charles T., 1980. "Tax incentives and charitable giving: evidence from a panel of taxpayers," Journal of Public Economics, Elsevier, vol. 13(3), pages 319-340, June.
    3. Feldstein, Martin S & Taylor, Amy, 1976. "The Income Tax and Charitable Contributions," Econometrica, Econometric Society, vol. 44(6), pages 1201-1222, November.
    4. Boskin, Michael J & Feldstein, Martin S, 1977. "Effects of the Charitable Deduction on Contributions by Low Income and Middle Income Households: Evidence from the National Survey of Philanthropy," The Review of Economics and Statistics, MIT Press, vol. 59(3), pages 351-354, August.
    5. 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.
    6. Reece, William S, 1979. "Charitable Contributions: New Evidence on Household Behavior," American Economic Review, American Economic Association, vol. 69(1), pages 142-151, March.
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    1. Timm Bönke & Nima Massarrat-Mashhadi & Christian Sielaff, 2013. "Charitable giving in the German welfare state: fiscal incentives and crowding out," Public Choice, Springer, vol. 154(1), pages 39-58, January.
    2. Margaret E. Brehm, 2018. "The Effects of Federal Adoption Incentive Awards for Older Children on Adoptions From U.S. Foster Care," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 37(2), pages 301-330, March.
    3. Daphne T. Greenwood, 1993. "Price and Income Elasticities of Charitable Giving: How Should Income Be Measured?," Public Finance Review, , vol. 21(2), pages 196-209, April.
    4. Lawrence B. Lindsey, 1985. "The Effect of the Treasury Proposal on Charitable Giving: A Comparison of Constant and Variable Elasticity Models," NBER Working Papers 1592, National Bureau of Economic Research, Inc.
    5. 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.

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