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Charity as Income Redistribution: A Model with Optimal Taxation, Status, and Social Stigma

Working paper
Authors Thomas Aronsson
Olof Johansson-Stenman
Ronald Wendner
Publisher University of Gothenburg
Place of publication Gothenburg
Publication year 2019
Published at Department of Economics
Language en
Links hdl.handle.net/2077/61855
Keywords Conspicuous consumption, conspicuous charitable giving, social status, optimal income taxation, warm glow, stigma
Subject categories Economics

Abstract

Our framework integrates (i) public and private redistribution, (ii) the warm glow of giving and stigma of receiving charitable donations, and (iii) status concerns emanating from social comparisons with respect to charitable donations and private consumption. Whether charity should be taxed or supported largely depends 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 (which relaxes 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 we examine how the optimal marginal income tax structure should be adjusted in response to charitable giving. Numerical simulations demonstrate that the quantitative effects of the aforementioned mechanisms can be substantial.

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