Charitable Contributions by Low- And Middle-Income Taxpayers: Further Evidence With a New Method

This paper examines whether charitable giving by individual taxpayers, including nonitemizers, is responsive to the deduction incentives provided by tax laws. We employ the Simultaneous Equations Tobit model to estimate the price elasticity of giving. In the model, we explicitly incorporate the selectivity bias arising from estimating a censored regression and the endogeneity bias due to the dependence of marginal tax rates on the level of contributions. The empirical results from 1985 tax return data suggest that giving by low-and middle-income taxpayers is responsive to the price change arising from the charitable deduction. The mixed evidence of the existing literature reflects the failure to correct both biases at the same time.