Reverend Lovejoy in Viva Ned Flanders (The Simpsons, Season 10): "And, once again, tithing is ten percent off the top. That's gross income, not net. Please people, don't force us to audit."
Some of our more popular articles at DQYDJ have been on charitable giving. My colleague PK has written about giving time as opposed to money here, here, and here. He also has written about the most effective way to donate money here. Where I will focus in this article, however, is on donating money to charities. These topics have also been covered by PK here . If you are reading this article and have not read those articles, please take the time to at least glance at the numbers. They are very interesting reads and a fantastic primer to an interesting topic in Economics.
Now, onto this article. The issue I will be addressing is whether charitable contributions should be granted a tax exemption. The final article mentioned above (which links to the mint.com article) mentions the fact that the tax exemption for charitable contributions costs the American government around $37 billion dollars a year. As a country, many are worried about the federal deficit the government is running (or the increasing debt, depending on what figures you are glancing at). Either way, decreasing the deficit by $37 billion dollars a year would be attractive to most fiscal conservatives. So, why am I focusing on charitable giving? Am I saying that charitable giving is bad and that we should be taxing (read: discouraging) this behavior?
No, I am most definitely not. As mentioned above in the previous articles, charitable giving is an integral part of the American culture. The interplay of religion and charitable giving in American culture and the law have a longstanding tradition and is an important matter of pride for our country. I need not list the long litany of reasons that charities are an irreplaceable piece to the human capital of this country, but hear me out.
John List of the University of Chicago is known for revolutionizing a “natural experiment” method in Economics research. Many researchers have since followed his methods to address a wide array of important policy debates. Side-note: The John Bates Clark Medal was not awarded to John List (it was awarded bi-annually and was only awarded to economists under the age of 40), and many felt this was an injustice. Since this “debacle”, the Clark Medal is now awarded annually.
Enough of John List’s background… In 2007, List and Dean Karlan published an article in the American Economic Review that addressed the issue of the tax exemption of charitable giving. Here is a brief summary of what List and Karlan did. They sent out direct mail solicitations to over 50,000 previous donors of a non-profit organization. The donors were randomly selected to receive an offer of a 1-1 match on their dollar donated, a 2-1 match, a 3-1 match or no match at all (just a solicitation). The paper finds that if you are offered a match or not causes an increase in giving. The paper also finds, however, that how much you are offered in match does not matter at all in your donation amount. These results are a bit puzzling and are quite significant.
Consider the implications. If the dollar received by the charity is a benefit to the donor, then the experiment explains weird behaviors. If it costs $1 for the charity to receive $1, then donors recognize the price. But the difference between costing $0.50 (1-1), $0.33 (2-1) and $0.25 (3-1) for each dollar received by the charity does not affect giving at all! Economists refer to this dichotomy as the intensive versus the extensive margin.
Now, what does this all mean? The U.S. government implicitly offers a small match on charitable donations equal to your marginal tax rate. For example, a dollar received by charities only costs $0.65 to those in the 35% tax bracket. Should the U.S. government be subsidizing donations if those who donate anyway do not respond at all to the actual price of the donation? This argument is akin to saying that Americans are generous citizens in the first place, so they will donate no matter what. It is a cynical way of trying to raise money for the federal government, but (as mentioned above) $37 billion dollars is pretty important.
I am not suggesting that this is necessarily the best policy decision. Firstly, having to tax religious groups (35% of charitable giving) is probably not legal or politically viable in the first place. Secondly, I don’t foresee any politicians taking a hard-line stance against charities (“As a congressman, my first points will be to tax those damned charities! They have been given a free reign for far too long!”)
Bottom line: Whether you feel this is a reasonable policy decision or not, it is an interesting point to note that how much people donate to charity does not depend on the price of the donation (again, I am only talking about donating money, not time).