How Does Tax Policy Impact Donations to Public Research Universities in Japan and the U.S.?

• In Event: Government relationship with higher education

Proposal

Introduction
In recent years, Japanese policymakers and university managers have taken active interest in donations used to support higher education. In light of massive budget deficits, the government may no longer rapidly increase subsidies for university activities. Thus, national research universities have had to be content with set endowments and have had to undertake fundraising activities since the mid-2000s. Nevertheless, Japanese donations have not increased dramatically, while the U.S.’s higher education system has experienced increasing donations. According to MEXT (2018), the top U.S. public universities receive five times as much as their counterparts in Japan. Discovering the determinants of such donations in both countries may help Japanese and other Asian researchers understand what is needed to increase them and may ultimately help develop a sustainable higher education system. In this context, embarking on research to clarify university donor behavior from an international comparative perspective is a key concern of higher education research. This paper focuses on how tax policy impacts donations to public research universities in Japan and the U.S. using financial data from both countries.

Theoretical Framework
Many previous studies in the U.S. have shown that the macro trends for donations to the U.S.’s higher education institutions are strongly correlated with stock prices (Bristol 1992, Clotfelter 2003, Drezner 2006, Ehrenberg & Smith 2001, Leslie et al. 1983, Smith & Ehrenberg 2003). These studies likely used stock prices as an indicator of social wealth, and some studies have gone so far as to interpret this phenomenon as implying that potential donors make donations as their wealth increases. However, there is another channel linking stock prices and donations: under a given tax policy, stock prices affect “the price of giving” so that donations increase as stocks increase in value (Clotfelter 2003, Fukui 2011, Fukui 2018). While previous studies are insightful, there is a need to better understand why stock prices influence donations from a tax policy perspective.

The price of giving is the net cost to the donors (Andreoni 2006). If there is a tax system by which the government provides tax benefits to donors such as charitable deductions, one might consider that the government pays a portion of the costs of donating. Hence, theoretically, the more the price of giving declines, the greater the incentive to donate increases. The important point is that the donor’s cost depends on a country’s tax structure.

Compared with the Japanese tax system, one of the unique points of the U.S.’s federal tax structure is that it gives huge tax benefits for donations of appreciated properties such as stock, land, or property to U.S. institutions of higher education (Fukui, 2014). If they give such gifts to universities, they can deduct the fair market value of their appreciated property gifts from their income tax. Moreover, donors are exempt from paying capital gains tax. Under this federal tax policy, the more the stock prices increase, the more the price of giving decreases. On the other hand, when donors donate gifts of appreciated property to Japanese universities, they are exempt from capital gains tax, but they may only deduct the acquisition value of the stock price from their income tax (MEXT, 2003). In contrast to the U.S. tax system, in Japan, the more the stock prices increase, the more the price of giving increases. This fact means that rising stock prices create a disincentive for donors. Therefore, we must consider why stock prices do not always have a positive effect on donations to higher education and verify the hypothesis that the impact of stock prices varies according to each country’s tax structure.

Study Methods
To verify the hypothesis, this paper compares the relative impacts of stock prices on donations in higher education between Japan and the U.S., using panel data on donations made to sixteen Japanese public research universities from 2007–2008 to 2015–2016, and donations to one hundred four U.S. public research universities from 2007–2008 to 2015–2016. The dependent variables are total donations to public research universities in Japan, which are derived from each university’s financial statements, and total donations to U.S. public research universities, derived from the Council for Aid to Education (2017). The independent variables were the stock prices nestled in the annual Nikkei Stock Price Index for Japan and the annual Standard & Poor’s 500 Index for the U.S. In addition, I used state appropriations granted to each university and regional per capita income as control variables. Public policy affects donor behavior not only through its tax rules but also by its fiscal actions. Some researchers have stated that government subsidies have a crowding-in effect on donations to universities (Cheslock & Gianneschi, 2008), while others have shown that subsidies have a crowding-out effect on donations to universities (Leslie & Ramey, 1988; Liu, 2006). However, it must be pointed out that most of the research related to this topic has used donations to U.S. higher education data, leaving the effect of governments’ fiscal policy in Asian countries unclarified. Using panel data analysis, this study also considers the effect of government appropriations.

Preliminary Results
As many previous studies have shown, the results indicated that stock prices and donations are correlated in the U.S., with a statistically significant positive impact on donations. In contrast, surprisingly, stock prices had a negative effect on donations in Japan. As discussed earlier, the Japanese tax system allows donors to deduct only the acquisition value of the stock price from taxable income. Therefore, higher stock prices have a negative effect on donations to higher educational institutions. In contrast to earlier findings, this outcome implies that higher stock prices do not always induced donations to universities. Each country’s tax structure is important when looking for possible links between stock prices and donations to universities.

Author

• Fumitake Fukui, Kamakura Women's University