There is a substantial literature estimating the responsiveness of charitable donations to tax incentives for giving in the USA. One approach estimates the price elasticity of giving based on tax return data of individuals who itemize their deductions, a group substantially wealthier than the average taxpayer. Another estimates the price elasticity for the average taxpayer based on general population survey data. Broadly, results from both arms of the literature present a counterintuitive conclusion: the price elasticity of donations of the average taxpayer is larger than that of the average, wealthier, itemizer. We provide theoretical and empirical evidence that this conclusion results from a heretofore unrecognized downward bias in the estimator of the price elasticity of giving when non-itemizers are included in the estimation sample (generally with survey data). An intuitive modification to the standard model used in the literature is shown to yield a consistent and more efficient estimator of the price elasticity for the average taxpayer under a testable restriction. Strong empirical support is found for this restriction, and we estimate a bias in the price elasticity around − 1, suggesting the existing literature significantly over-estimates (in absolute value) the price elasticity of giving. Our results provide evidence of an inelastic price elasticity for the average taxpayer, with a statistically significant and elastic price response found only for households in the top decile of income.
- Charitable giving
- Tax incentives