Scandinavian Working Papers in Economics
Working Papers in Economics,
University of Gothenburg, Department of Economics
No 642: Redistribution through Charity and Optimal Taxation when People are Concerned with Social Status
Thomas Aronsson (), Olof Johansson-Stenman () and Ronald Wendner
Additional contact information
Thomas Aronsson: Department of Economics, Umeå School of Business and Economics, Umeå University,
Olof Johansson-Stenman: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O. Box 640, SE 40530 Gothenburg, Sweden
Ronald Wendner: Department of Economics, University of Graz, Austria
Abstract: This paper deals with tax policy responses to charitable giving based on a model of optimal redistributive income taxation. The major contribution is the simultaneous treatment of (i) warm-glow and stigma effects of charitable donations; (ii) that the warm glow of giving and stigma of receiving charity may to some extent depend on relative comparisons; and (iii) that people are also concerned with their relative consumption more generally. Whether charity should be taxed or supported turns out to largely depend on the relative strengths of the warm glow of giving and the stigma of receiving charity, respectively, and on the positional externalities caused by charitable donations. In addition, imposing stigma on the mimicker (via a relaxation of the self-selection constraint) strengthens the case for subsidizing charity. We also consider a case where the government is unable to target the charitable giving through a direct tax instrument, and examine how the optimal marginal income tax structure is adjusted in response to charitable giving.
Keywords: Conspicuous consumption; conspicuous charitable giving; optimal income taxation; warm glow; stigma
36 pages, January 12, 2016
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