On the Desirability of Taxing Charitable Contributions

social marginal benefit of the transfer (T) and μ₁ - μ₂ > 0 [see equation (17)] is the
social marginal benefit of the public good (g) completes the interpretation of equation
(18). Naturally, equation (18) reduces to:

0t* T* *,. =μ₂ ∙ z ∙ [1 - F(ι^)] ≥ 0.

As explained above, a unit tax on contributions shifts resources at the amount of

z ∙ [1 - F(ι^)] from the public good provision (g) to the uniform transfer (T). The net
marginal social benefit of this shift is indeed μ₂ ∙ z ∙ [1 - F(ι^)], because μ₂ is the
difference between the marginal social benefit of the uniform transfer ( μ₁ ) and the
public good (μ₁ - μ₂). Note that the marginal social benefit of increasing g cannot
exceed that of increasing T, because g is subject also to an additional constraint
according to which it cannot fall short of the total amount of contributions. Thus, we
establish:

Proposition 2: When contributions are purely driven by status seeking (β = 1), the
optimal tax on contributions is non-negative.

Note that when the constraint in equation (11), which states that the
government may not confiscate contributions and direct them towards its general
budget [equation (10)], is binding, we may plausibly assume that the corresponding
Lagrange multiplier (μ₂) is strictly positive. In this case, it is optimal to levy a
positive tax on contributions. Naturally, this will be the case when the demand for the
public good is sufficiently small (that is, when α is sufficiently small).

In contrast, when the demand for the public good is high enough (that is, when
α is large enough), the constraint in equation (11) will not be binding. Hence, μ₂ = 0,
and it becomes optimal to set s=0. That is, it is not optimal for the government to

19

<<   17   18   19   20   21   22   23   >>

More intriguing information