Is Charitable Giving by the Rich Really Responsive to the Income Tax?

The income tax deduction for charitable contributions is limited to a fraction of reported income. Consequently, some of the contributions by large donors are not deductible in the year of the transfer, if ever deductible at all. Because this limit is typically ignored in the empirical literature on charitable giving, the marginal tax rate is often measured with error. In addition to the errors in measuring the tax rate or price, income and the size of gifts are also measured with error. Income is often understated as the embedded accrued gains in gifts of appreciated assets are overlooked leading to a situation where the size of gifts is much larger than the reported income measure. In addition, the deduction for contributions is usually employed as the measure of transfers when using administrative records even though the amount contributed can be much larger. Combined, these errors may bias estimates of the effects of the tax deduction. This paper reviews the key features of the tax treatment of charitable gifts by individuals. It employs panel data on high income individuals to explore the sensitivity of behavioral responses to taxes when measurement errors are corrected; the reported deduction in a given year is corrected by using contributions and carry-overs from prior years as well as from merged gift tax returns and publically available information. The preliminary empirical findings suggest that giving by the rich may not be as responsive to the income tax as previously thought, and raise a number of questions in modeling the behavior of the wealthy