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The price elasticity of charitable giving: does the form of tax relief matter?

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Abstract

We use a survey-based approach to compare the effects of alternative forms of tax relief on donations—a tax rebate for the donor and a matched payment to the charity. On accounting grounds these two are equivalent but, in line with earlier experimental studies, we find that charitable contributions are significantly more responsive to a match than to a rebate. The difference can largely be explained by the fact that a majority of donors do not adjust their nominal donations in response to a change in subsidy. We relate our findings to the growing literature on behavioural tax policy.

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Notes

  1. For simplicity of exposition we assume Y is not taxed; the subsidies are effectively credits.

  2. A narrow interpretation is that the warm glow is derived from the sacrifice which would depend only on the chequebook donation net of any rebate. But, equally plausibly, individuals may care about their personal contribution to a good cause, i.e. the warm glow comes from g. This is the implicit assumption here.

  3. When it was originally established, Gift Aid provided tax relief on donations exceeding a minimum threshold. This threshold was initially set at £ 600, reduced to £400 from May 1992 and to £250 from March 1993 and abolished altogether in 2000.

  4. The UK tax system has a basic marginal tax rate of 20 % on earnings between £6,475 and £43,875 (2009–2010 rates) and a higher marginal tax rate of 40 % on earnings above this. Median earnings in 2009 were £20,801. In April 2010—after the survey was run—a higher rate of 50 % was introduced for incomes over £150,000.

  5. The match and rebate rates may be linked to the tax system in which case changes to the tax rate would have a separate effect. In the analysis, we assume that the match and rebate are independent of the tax system, which were true of the scenarios that we tested.

  6. They do not report that corresponding elasticities for chequebook donations, but these would be \(-\)0.14 in the case of the match and \(-\)0.36 in the case of the rebate.

  7. Our study differs from a classic WTP study, where according to Harrison and Rutström (2008) ‘as a matter of logic, if you do not have to pay for the good but a higher verbal willingness to pay (WTP) response increases the chance of its provision, then verbalize away to increase your expected utility!’ In our case, it is not clear ex ante whether donors would overstate, since they are directly informed in the survey about tax changes and incur no real adjustment costs or under state, since a no adjustment response is the easiest answer to give.

  8. In our sample of higher rate taxpayers, 39 donors were not planning to make a donation in the next six months. We asked them to think about a donation they had made in the previous six months. Our results are not sensitive to excluding this group altogether.

  9. Specifically, respondents are asked to say how they would respond—by increasing/decreasing their donation or leaving it the same. No higher rate taxpayer responded that they do not know at this stage. Donors that would increase/decrease their donation are asked to say what their new donation would be. 27 donors said that they did not know and were then prompted with different levels of adjustment. Our results are not sensitive to excluding this group.

  10. 60 respondents did not respond to one of the scenarios. We have kept these respondents in the analysis; the results are very similar if we exclude them.

  11. This is efficient and unbiased if the rebate and match terms are unrelated to individuals’ characteristics. Since the rebate and match terms are randomly allocated to individuals this should be true by assumption. Very similar results were obtained from a fixed effects model.

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Acknowledgments

We would like to thank Charities Aid Foundation and Justgiving who allowed us to survey their donors. We have received helpful comments and suggestions from the editor and two anonymous referees, Jim Andreoni, Chris Woodruff, Abigail Payne, Rob Sauer, HMRC economists and seminar participants at Oxford University and the Institute for Fiscal Studies. All remaining errors are our own.

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Correspondence to Sarah Smith.

Appendices

Appendices

1.1 Appendix 1

See Table 3.

Table 3 Summary statistics

1.2 Appendix 2: presentation of the scenarios

Initial donation

How likely are you to make any Gift Aid donations to a charity within the next 6 months? This could be a one-off donation or a regular donation set up as a standing order or direct debit.

  • Certain

  • Very likely

  • Fairly likely

  • Not very likely

  • Not at all likely

  • Don’t know

IF ‘Certain’ or ‘Very likely’ or ‘Fairly likely’

And how much do you think that you are likely to give (to the nearest pound)? If the donation you are thinking about is a regular direct debit or standing order, please give the total of that donation for a 6 month period.

Introduction to scenarios

The Gift Aid scheme allows charities to reclaim the basic-rate income tax on your donation and allows higher rate taxpayers to claim back higher rate tax relief. You are now going to be presented with two hypothetical changes to the Gift Aid scheme—either to the amount that the charity can reclaim and/or to the amount that higher rate taxpayers can claim back. In each case you will be asked to consider whether the amount of money that you are likely to give to charity would be affected by the proposed changes.

Example

Through the Gift Aid scheme, the charity you are donating to reclaims the basic-rate income tax on your donation. This is worth 25 pence for every £1 you donate.

Suppose instead that the charity received 30 pence for every £1 you donate. (Assume that the amount of higher rate relief that you can claim back is unchanged).

Thinking about your donation of [£X] would this change affect the amount you are likely to give? SINGLE CODE ONLY

  • Yes—I would give more than [£X]

  • Yes—I would give less than [£X]

  • No—I would give the same amount

  • Don’t know

IF yes, how much would you be likely to give (to the nearest pound)?

  • (write in)

  • Don’t know

IF ‘don’t know’, which of these comes closest to what you think you might increase/ reduce your donation by?

  • By 10 % or less?

  • By more than 10 %?

  • Don’t know

If more than 10 %, Would you increase/ reduce your donation by 25 % or more?

  • Yes

  • No

  • Don’t know

If yes, Would you increase/ reduce your donation by 50 % or more?

  • Yes

  • No

  • Don’t know

figure a

1.3 Appendix 3

These tables summarize p-values for testing the equality of the coefficients associated with the different scenarios (Eq. 3). We include binary indicators for all ten scenarios (rather than the eight distinct scenarios), allowing us to test for embedding effects. Specifically, the 30 pence match scenario and the 50 pence match scenario are included twice and we find no significant difference in the responses. This is in contrast to significantly different responses across many of the other (different) scenarios (Table 4).

Table 4 Testing the equality of coefficients (\(p\)-values)

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Scharf, K., Smith, S. The price elasticity of charitable giving: does the form of tax relief matter?. Int Tax Public Finance 22, 330–352 (2015). https://doi.org/10.1007/s10797-014-9306-3

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