The Economic Value of the Charitable Sector
Chapter 6: Providing Fiscal Incentives for Giving
6. Providing ﬁscal incentives for giving 6.1 INTRODUCTION In many countries, including the United Kingdom, charitable donations receive special tax-exempt status. The rationale for this policy is precisely to stimulate charitable giving by reducing the ‘price’ of making a donation, thereby counteracting the free-rider tendency and helping charities to capture their full economic value. Since the government contributes µ per cent of every £1 given to charity, where µ is the marginal rate of tax rate, it only costs £(1 – µ) to give £1 to charity. Clearly, the effectiveness of this policy depends on the ‘price’ elasticity of donors. A major focus of the US literature on giving and volunteering has been the estimation of price and income elasticities, particularly in the context of evaluating the efﬁcacy of ﬁscal inducements towards philanthropic behaviour. Econometric studies have in general found that in the USA monetary donations are price-elastic with respect to tax incentives, even though in the case of volunteering the results are not so clear. At a time when the UK government has been reviewing its own – very different – tax treatment of the charitable sector (Banks and Tanner, 1998), the econometric literature gives very little guidance on the price-responsiveness of British philanthropists. The few British studies that exist either exclude the issue of price-responsiveness altogether (Banks and Tanner, 1997; Pharoah and Tanner, 1997) or are subject to data limitations which make it difﬁcult to interpret the price effects obtained (Jones and Posnett, 1991a,b). Yet such estimates are critical in informing...
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