THE EFFECT OF A TAX DEDUCTION ON CHARITABLE CONTRIBUTIONS BY LOW- AND MIDDLE-INCOME TAXPAYERS (LOW-INCOME)

The purpose of this study is to answer the following research questions: (1) Is giving by taxpayers in low- and middle-income classes responsive to the deduction incentives provided by tax laws? (2) Does itemization have a significant independent effect on the decision to make a charitable contribution? Since the giving behavior of taxpayers in the above income classes and particularly among nonitemizers is unclear, the identification of differences in responsiveness between taxpayers in different income classes and between itemizers and nonitemizers provides a further step toward the establishment of an efficient and consistent tax policy regarding charitable contributions.; A Simultaneous Equations Tobit model is constructed and analyzed theoretically and empirically. This model explicitly incorporates, in the contribution demand function, the selectivity bias arising from estimating a censored regression and the simultaneous bias due to the dependence of the price of giving on the level of contributions. A two-step estimation technique is used to estimate the price elasticities of giving on samples of taxpayers selected from the 1985 Individual Tax Model File in order to assess the effectiveness of the deduction policy under the Economic Recovery Tax Act of 1981 that allowed tax deductions for charitable contributions by low- and middle-income taxpayers, including nonitemizers.; This study finds substantially high price elasticity estimates for itemizers, but insignificant positive estimates for nonitemizers. The nonitemizers' elasticity estimates are possibly contaminated by the unique and irregular giving behavior of borderline nonitemizers. The switch from a nonitemizer to an itemizer is found to have a significant, positive impact on contributions. However, this finding of an itemization effect must be interpreted with caution because the sample of nonitemizers, which is a control group, includes borderline nonitemizers.; The results of this study suggest that, in general, deduction policy regarding itemizers' contributions effectively attained its goal because itemizers are found to be sensitive to tax incentives in making their contribution decisions regardless of income class. However, deductions for nonitemizers' giving provided a windfall tax benefit to nonitemizers and induced many high-income taxpayers to switch their itemization status to nonitemizers.