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Global Evidence on Effective Design of Tax Incentives for Charitable Giving

Wed, July 11, 9:00 to 10:30am, Room, 5A 33


How do countries offering different tax incentives for nonprofit organizations vary in the level and nature of generosity? Governments across the globe use a variety of tax instruments to encourage charitable giving, in addition to other instruments such as support for accountability programs and direct financial support. What is the effectiveness of these forms of support to nonprofit organizations? We answer this question in theory and with an analysis of empirical data, expecting to find that the effect varies strongly between countries if tax incentives vary.

Our expectation is based on the observation that the design of tax incentives for charitable giving varies widely between countries. The most well-known form is an income tax deduction, as it is used in the USA, Germany and the Netherlands, for example. Even when the design of these incentives is the same, the tax benefit varies both between and within these three countries, depending on the tax rate and applicable caps on the deductible amount. The Netherlands is a special case as it provided enhanced deductibility for donations to registered cultural institutions through a ‘multiplier’.

Income deductions are often criticized because of what Surrey and Mc Daniel (1985) called the ‘upside down effect’: high income groups benefit more than low income groups. This problem is addressed by other designs such as a tax credit (deduction from tax instead of from income), such as is applied in France and Canada. In Canada, the deduction increases progressively, not with the amount of income such as is the case with the traditional gift deduction, but with the amount donated. Another alternative is a tax assignment where tax payers may assign a small percentage of their tax due to a charity, a system applied in Italy (cinque per mille) and various countries in Eastern Europe such as Hungary, Poland and Romania (Nährlich, 2013). A similar alternative where the benefit is given directly to the charity is giving a refund to the charity as opposed to the tax payer as is the case with the UK gift aid. Such an instrument could reduce leakage. This is already quite similar to matching. This shows that there is not a dichotomy between tax incentives and direct subsidies such as matching, but rather a continuum.

Financial support to nonprofit organizations can also take many forms. The government can support nonprofits directly, by providing subsidies, but may also provide conditional subsidies in the form of matching grants. While subsidies that are not conditional upon private income reduce the incentive for organizations to raise private contributions, matching grants that are conditional upon private contributions provide an incentive for fundraising.

Quick et al. (2014) conclude that tax incentives for philanthropy are the norm rather than the exception. Overall, 86% of high-income countries offer some form of tax incentive for giving by individual donors Furthermore, they found that countries that offer tax incentives to individuals see higher rates of participation in giving money to charity. The idea behind these tax incentives is that they decrease the relative cost of giving compared to other forms of consumption. Given the findings of List (2011) and Peloza and Steel (2005) that giving is price-elastic, a reduction in the price of giving would increase charitable giving.

Improving upon previous research, we present evidence from a set of multiple regression analyses on aggregate giving rates from the Gallup World Poll (CAF, 2014) and evidence from hierarchical (‘multilevel’) regression analyses on the amount donated to charitable causes in 26 countries from the Individual International Philanthropy Database ((IIPD, Wiepking et al., 2017).

In addition to the availability of tax incentives for donations, we include indicators for the form that the tax incentives take, as well as variables for the price of giving, and other aggregate predictors of giving such as GDP, perceptions of corruption, income inequality, and philanthropic freedom.

CAF (2014). World Giving Index. West Malling: CAF.
Center for Global Prosperity (2015). Index of Philanthropic Freedom. Washington: Hudson Institute.
List, J.A. (2011). The Market for Charitable Giving. Journal of Economic Perspectives, 25(2): 157-180.
Nährlich, S. (2013). Percentage Philanthropy. Selbstbestimmte Steuerzuweisungen an Gemeinnützige. Stiftung & Sponsoring, 4: 26-27.
Peloza, J. & Steel, P. (2005). The Price Elasticities of Charitable Contributions: A Meta-Analysis. Journal of Public Policy & Marketing, 24(2): 260-272.
Quick, E., Kruse, T.A., & Pickering, A. (2014). Rules to Give By. A Global Philanthropy Legal Environment Index. Washington/London: Nexus/McDermott Will & Emery/Charities Aid Foundation.
Stanley, S.S., & McDaniel, P.R. (1985). Tax expenditures. Cambridge: Harvard University Press.
Wiepking, P. et al., (forthcoming). Wiepking, P., & Handy, F. [principle investigators]. Individual International Philanthropy Database (IIPD). [Machine Readable Data File]. Rotterdam, the Netherlands: Erasmus University Rotterdam [Distributor].