Scandinavian Working Papers in Economics
Umeå Economic Studies,
Umeå University, Department of Economics
No 919: 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 University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden
Olof Johansson-Stenman: Department of Economics, School of Business, Economics and Law, University of 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
35 pages, January 8, 2016
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174444_ues919.pdf
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