The Interpretation of Econometric Estimates of the Tax Incentive to Engage in Philanthropy.

The economic concept of price elasticity emerges from a maximization problem faced by a price-taking individual. That is, price does not depend on quantity consumed. If the complement of the marginal income tax rate is interpreted as the price of a deductible expenditure, this price is unrelated to the amount expended only if marginal rate is constant. When marginal rates increase with taxable income, i.e., Progressive taxation, price and amount expended are related. As a result, the underlying maximization problem is not analogous to the one from which a crisp notion of price elasticity obtains, and thus econometric estimates of the price elasticity are difficult to interpret. We demonstrate the nature of this problem, focusing on estimates of the price elasticity of charitable contributions, and provide empirical evidence that estimated price elasticities are not well suited for predicting the effects of tax reform.