Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 959: Charity, Status, and Optimal Taxation: Welfarist and Paternalist Approaches

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
Ronald Wendner: Institute of Economics, University of Graz

Abstract: This paper deals with tax policy responses to charitable giving, defined in terms of voluntary contributions to a public good, to which the government also contributes through public revenue; the set of tax instruments contains general, nonlinear taxes on income and charitable giving. In addition to consumption, leisure and a public good, individuals obtain utility from the warm glow of giving and social status generated by their relative contributions to charity as well as their relative consumption compared with others. We analyze the conditions under which it is optimal to tax or subsidize charitable giving and derive corresponding optimal policy rules. Another aim of the paper is to compare the optimal tax policy and public good provision by a conventional welfarist government with those by two kinds of paternalist governments: The first kind does not respect the consumer preferences for status in terms of relative giving and relative consumption, while the second kind in addition does not respect preferences for warm glow of giving. The optimal policy rules for marginal taxation and public good provision are similar across governments, except for the stronger incentive to tax charitable giving at the margin under the more extensive kind of paternalism. Numerical simulations supplement the theoretical results.

Keywords: Conspicuous consumption; conspicuous charitable giving; optimal taxation; warm glow

JEL-codes: D03; D62; H21; H23

67 pages, April 16, 2019

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