Justin Smith - The effect of tax price on donations, evidence from Canada

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Jan Kabátek

j.kabatek@unimelb.edu.au

Title: The effect of tax price on donations, evidence from Canada

Abstract: What is the tax price elasticity of charitable donations? While many countries provide tax policy that encourages donations, estimating the responsiveness of charitable donations to changes in benefits accruing to donors is difficult because the tax price and donations simultaneously depend on an individual's income. We use a large administrative dataset from Canada, the Longitudinal Administrative Database (or LAD) to estimate the tax price elasticity of donations. Our estimation strategy uses instrumental variables with fixed effects. Focusing on the time period for which the tax price of giving is a linear function of provincial and federal tax credit rates we use variation in the marginal income tax rates to instrument for the tax price. We estimate that the tax price elasticity of charitable donations is -0.6, implying that donations are inelastic with respect to the tax price. We discuss our findings in light of the limitations of our estimator, and the possible policy recommendations of our result.

Presenter: Justin Smith, Wilfrid Laurier University

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