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The impact of taxes and wasteful government spending on giving

Published online by Cambridge University Press:  14 March 2025

Roman M. Sheremeta  and
Neslihan Uler Open the ORCID record for Neslihan Uler [Opens in a new window]
Roman M. Sheremeta
Affiliation:
Weatherhead School of Management, Case Western Reserve University, 11119 Bellflower Road, Cleveland, OH 44106, USA Economic Science Institute, Chapman University, One University Drive, Orange, CA 92866, USA
Neslihan Uler*
Affiliation:
Agricultural and Resource Economics, University of Maryland, 7998 Regents Dr, College Park, MD 20742, USA
*
[email protected]
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Abstract

We examine how taxes impact charitable giving and how this relationship is affected by the degree of wasteful government spending. In our model, individuals make donations to charities knowing that the government collects a flat-rate tax on income (net of charitable donations) and redistributes part of the tax revenue. The rest of the tax revenue is wasted. The model predicts that a higher tax rate increases charitable donations. Surprisingly, the model shows that a higher degree of waste decreases donations (when the elasticity of marginal utility with respect to consumption is high enough). We test the model’s predictions using a laboratory experiment with actual donations to charities and find that the tax rate has an insignificant effect on giving. The degree of waste, however, has a large, negative and highly significant effect on giving.

Keywords

Charitable givingTaxWasteRedistributionExperimentPublic goods provisionNeutralityIncome inequality

JEL classification

D64: Altruism • Philanthropy • Intergenerational Transfers H21: Efficiency • Optimal Taxation C93: Field Experiments
Type
Original Paper
Information
Experimental Economics , Volume 24 , Issue 2 , June 2021 , pp. 355 - 386
Copyright
Copyright © 2020 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (https://doi.org/10.1007/s10683-020-09673-9) contains supplementary material, which is available to authorized users.

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