On the Desirability of Taxing Charitable Contributions

∂ ∂ ■       1        1                                         ∂ ^          , .     ∂Z I

respect to 5 at 5=0, fixing the other tax parameters, t and T, to obtain — ₀ = -z.

∂s

Thus, a unit tax levied on contributions reduces the amount of contributions entailed
by signaling by Z, thereby raising the utility derived by the individuals who engage in
signaling, and consequently social welfare, by the corresponding expression in
equation (16).

The last term captures the Pigouvian motive for subsidizing contributions. To
see this, note first that the first-order condition for the optimal provision of the public
good implies that:

w

(17)   ( μ - μ) = α∙ r'( g ) ∙ ∫W'[V ( w )] dF ( w ) > 0.

w

Because -z ∙ [1 - F(w)] is the effect of a unit tax on contributions on the total amount
of public good, it follows that the third term measures indeed the gain in social
welfare associated with the increase in public good provision generated by a unit
subsidy granted to contributions. The third term is negative and works in the direction
of granting a subsidy to contributions.

Note that the signaling correction term, which is the gain from a unit tax on
contributions derived by the status-signaling individuals, is fully offset by the fact that
each one of these individuals bears the tax on contributions. Hence, equation (16)
reduces to:

_o._r* ... =μ ∙ Z ∙ [1 - F ( w)] - ( μ - μ) ∙ Z ∙ [1 - F ( w)].

5=0,t ,T ,g ,z

The interpretation of equation (18) is straightforward. A unit tax on contributions

raises government revenues [and the transfer (T)] by Z ∙ [1 - F(w)]. But it also reduces
total contributions for the public good by the same amount. Noting that μ₁ is the

18

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