On the Desirability of Taxing Charitable Contributions

The case for subsidizing charitable contributions (allowing for tax deductions
and/or credits) is further weakened when contributions are driven also by a status
seeking motive. To demonstrate this argument in its sharpest relief, in the coming
section we consider the extreme case where contributions are driven solely by the
latter motive.

4.2. The Case of Pure Status-Signaling

We address the question of the desirability of levying a tax on charitable
contributions, as a supplement to the optimal linear labor-income tax system, when
the contribution motive is driven by pure status seeking, namelyβ= 1. Note crucially
that the status-signaling activity per-se (that is, apart from its direct contribution to the
amount of the public good) is purely wasteful. In the absence of signaling all
individuals would obtain the same average status, whereas with signaling some do
gain high status and some gain no status, leaving the average level of status exactly at
the same level as without signaling. We emphasize that the aggregate (average)
amount of status is exogenously given, at the level of [1 - F(iɪɔ] ∙ b. Thus, status
signaling can only affect the distribution of this aggregate level of status. When no
one signals (that is, in a pooling equilibrium) the expected value of status derived by
each individual is given by the average level of status.

We re-formulate the Lagrangean for the case β= 1, given a tax s on
contributions, to obtain:

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