On the Desirability of Taxing Charitable Contributions

into account the optimal choices of the individuals. The egalitarian social welfare
function is given by:

w

(9) W ≡ ∫W [V ( w )] dF ( w ),
w

where W'(V) > 0 and W''(V) < 0. Naturally, the objective in (9) is maximized subject
to the government revenue constraint,
ww

(10) t ■ ∫w[1 -1(w)]dF(w) + (1 + s) ∙∫z(w)dF(w) - g - T ≥ 0.
ww

There is another constraint, which requires that the government cannot confiscate the
charitable contributions and direct them to its general needs (redistribution purposes
in our case). Put differently, the level of public good provision should weakly exceed
the total amount of contributions:

w

(11) g -∫z(w)dF(w) ≥ 0.
w

To gain insight of the effect of status-seeking on the optimal tax treatment of
contributions, we will begin our analysis in the absence of this effect and introduce it
only later. That is, we first consider the case where contributions are driven entirely
by altruism, namelyβ = 0.

4.1. The Case of Purely Altruistic Contributions

We address the question of the desirability of levying a tax on (granting a subsidy to)
charitable contributions, as a supplement to the optimal linear labor income tax
system, when the contribution motive is purely altruistic. Starting from an optimal

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