Dynamic Income, Progressive Taxes, and the Timing of Charitable Contributions

摘要

The permanent income hypothesis suggests that empirical studies haveunderestimated how much permanent income affects charitable giving if people smooth their giving when transitory income changes. But the studies may have also overestimated the effect of permanent changes in tax prices. This is because changes in transitory income also change the relative tax prices of current and future giving when marginal tax rates increase with income, which may cause people to substitute between current and future giving. The author first examines these issues using a simple demand model. He then studies the issues empirically using a ten-year panel of tax-return data (1979-1988) that spans two major tax-law changes. The data allow him to separately estimate the effects of permanent income, transitory income, current tax prices, expected future tax prices, and other variables. Compared to price elasticities from previous studies, he finds that giving is much less elastic with respect to permanent changes in tax prices, but more elastic with respect to transitory price changes. He also finds that giving is much more elastic with respect to permanent income, but less elastic with respect to transitory income changes. The results imply that people smooth their giving when transitory income changes, but time their giving to exploit transitory price changes.