Taxes and Corporate Charity: Empirical Evidence From Microlevel Panel Data

This paper explores the relation between corporate contributions and tax rates to examine whether corporate philanthropy is motivated by profit maximization or managers' utility maximization, the two basic models of corporate giving that exist in the literature. No relation between contributions and tax rate is consistent with profit maximization, whereas either a positive or negative relation is consistent with investment in contributions beyond the profit-maximizing level. The empirical analysis is based on firmspecific longitudinal data on contributions and estimated marginal tax rates for a five-year period spanning the Tax Reform Act of 1986 (TRA86). The results are consistent with managers' utility maximization being an important motive for corporate contributions, but contributions beyond the profitmaximizing level are limited by a binding minimum profit constraint. In addition, the results indicate that the income elasticity of corporate contributions is low, ranging from 0.04 to 0.17 depending on how income is defined. These estimates are much lower than reported previously with aggregated data and firm-specific cross-sectional data.