Since 1917, itemizing tax filers in the United States have been able to subtract gifts to eligible charities from their taxable income. The deduction is especially valuable to successful entrepreneurs who donate corporate stock. Such philanthropy was seen as a close substitute for government spending until after the mid-twentieth century. In the 1950s and 1960s, high tax rates catalyzed the formation of large foundations from industrial fortunes and precipitated a national debate about the legitimacy of such giving. The midcentury debate preceded increased oversight of charities and foundations and a shift in the way US lawmakers debate the contribution deduction, from a savings reduction to an implicit cost.
The 2017 Tax Cut and Jobs Act increased the limitation on the tax deductibility of charitable contributions from 50 to 60 percent of adjusted gross income. This note estimates the effect of the share-of-income limitation on giving for the first time. Patterns in giving over time and across charities coincide with earlier changes in the share-of-income limit, consistent with a substantial policy effect. I estimate that the 2017 limit increase will boost aggregate household giving on the order of $10 billion.
From 1917 to 2012, donations by high-income households in the USA have moved inversely with income inequality. This association contradicts historical narratives and prevailing theory, both of which that imply that high-income households donate rising income shares when inequality increases. The negative correlation holds both unconditionally and after conditioning on other explanatory variables, at both the national and US state levels. Low payout ratios of foundations and endowed charities, combined with this observed relationship, imply that differences in charitable giving will tend to entrench, not reduce, inequality across places over time.
“Corporate Charitable Foundations, Executive Entrenchment, and Shareholder Distributions,” with Eric Ohrn. Journal of Economic Behavior & Organization, 152, pp. 235-253, August 2018. Abstract | Paper [PDF] | More
We show that firms with corporate charitable foundations increased shareholder distributions by less than one half as much as similar firms without foundations following the 2003 capital income tax cut, even after controlling for common explanatory factors such as executive shareholding. The findings are robust to alternative explanations and to common threats to causal identification. Further exploration reveals that our estimates capture a greater reluctance of foundation firms to initiate or rapidly increase shareholder payouts, but not a greater tendency to reduce or eliminate shareholder payouts. Additional analyses suggest managers direct funds that would have been paid out toward executive compensation and capital investment. In light of the fact that firms with foundations are more likely to exhibit a high degree of managerial entrenchment, we interpret these findings as evidence that foundations are both a sign of and vehicle for managerial self-dealing.
“Spend or Save? Nonprofits’ Use of Donations and Other Revenues.” Nonprofit and Voluntary Sector Quarterly, 46(6): 1142-1165, December 2017. Mentioned in The Chronicle of Philanthropy. Abstract | Paper [PDF] | More
Panel regression methods are used to estimate the links between nonprofits’ revenues by source and the uses of those revenues. While charities spend most types of revenue on program services, they overwhelmingly save revenue from donations. This is true for all types of charity by National Taxonomy of Exempt Entities code. This saving is not driven by donor restrictions or by short-term strategic shifts, but is consistent with expense smoothing over time. Policymakers should consider effects of donation incentives and government grants on the timing of outputs that result from different revenue sources.
“Do Tax Incentives Affect Charitable Contributions? Evidence from Public Charities’ Reported Revenues,” Journal of Public Economics, 137: 51-69, May 2016. Mentioned in Bloomberg View and The Chronicle of Philanthropy. Abstract | Paper [PDF] | More
This paper estimates the effect of the charitable contribution tax deduction on charities' donation revenue from charities' tax filings. A one percent increase in the tax cost of giving causes charitable receipts to fall by about four percent, an effect three times larger the consensus in the literature. Further analysis reveals substantial heterogeneity in the tax response by subsector: health care and home care are more tax-sensitive than other charities, while higher education and arts are less tax-sensitive. The results are consistent with substantial tax response heterogeneity within the sample and between sampled and unsampled charities, implying that the mean tax elasticity of charitable contributions is a poor predictor of tax incentive effects for individual charities.
“How Johnson Fought the War on Poverty: The Politics and Economics of Funding at the Office of Economic Opportunity,” with Martha J. Bailey. The Journal of Economic History 74(2): 351-388, June 2014. NBER Working Paper No. 19860. Winner of the Arthur H. Cole Prize for the the best article published in the Journal of Economic History from July 2013 to July 2014. Abstract | Paper [PDF] | More
The successes and failures of President Lyndon Johnson’s “War on Poverty” have been debated for decades. This paper contributes a novel quantitative analysis to the vast historical literature on the War on Poverty’s political economy. We find that the Office of Economic Opportunity (OEO) overwhelmingly directed its funds toward high-poverty areas, while also investing in Democratic strongholds and areas with bigger swings in favor of the Democrats in the 1964 Presidential election. Finally, we find quantitative support for Alston and Ferrie’s hypothesis about the role of the Southern paternalism in shaping the modern U.S. welfare state.
Though historical accounts have linked the overcrowded conditions on the Middle Passage to slaves’ ill health and high mortality rates, results from a large literature in economic history have not borne out these assertions. This paper demonstrates the importance of a statistical explanation: missing data. Studies finding no positive relationship between vessel crowding and Middle Passage mortality are driven by an unrepresentative sample of slave voyages. Using simple methods to correct for missing data on voyage duration, analysis of the Trans-Atlantic Slave Trade Database shows a strong and robust association between crowded slave voyages and slave mortality, consistent with historical accounts.
This paper computes the share of all household giving accounted for by the American households donating the largest amounts over the 1960–2012 period. The share of donations accounted for by a minority of top donors has risen sharply over this period. This rising concentration is driven by both larger gifts at the top and reduced giving by the broad majority of households. Charities are increasingly dependent on major donors, and the share of donations flowing to the charities receiving the highest levels of donation revenue has risen. The 2017 Tax Cut and Jobs Act preserved or increased donation incentives for many top donors, and is likely to decrease aggregate charitable giving by less than is widely feared, while accelerating the concentration of giving among those who give the most.
This paper demonstrates that economic inequality has a negative, causal effect on prosocial behavior, specifically, charitable giving. Standard theories predict that greater inequality increases giving, though income tax return data suggest the opposite may be true. We develop a new theory which, incorporating insights from behavioral economics and social psychology, predicts when greater inequality will lower charitable giving. We test the theory in an experiment on donations to a real-world charity. By randomizing the income distribution, we identify the effect of inequality on giving behavior. Consistent with our model, heightened inequality causes total giving to fall. Policy agendas that rely on charitable giving and other voluntary, prosocial behaviors to mitigate income and wealth inequality are likely to fail.
State-level individual income tax credits for charitable giving are a common and often generous subsidy for donors, but have not been examined holistically. This paper gathers novel panel data on each US state’s income tax credits for charitable contributions, identifying 46 credits in 23 states between 2000 and 2016. Generally, the credits target specific types of charitable giving and are more generous than federal and state charitable deductions, while not requiring taxpayers to itemize. These data are linked to the PSID/COPPS panel data on charitable giving to compute estimates of policy effects. States’ credits have little effect on giving, consistent with a lack of salience.