Thompson Rivers University

How do tax incentives affect charitable giving for international, social services, health, and religious purposes? Evidence from a Canadian study

December 14, 2012

Dr. Hossain and Dr. Lamb from the Department of Economics at Thompson Rivers University are becoming worldwide known experts in exploring the impact of tax incentives on charitable giving across Canada. The Canadian government provides a tax incentive to encourage charitable giving. Studying its impact is important from a public policy perspective. They estimated price elasticities of charitable giving across donation sectors in Canada in order to determine the tax incentive effective.

Donations at Eden ProjectTheir empirical results, using data from the 2007 Canada Survey of Giving, Volunteering and Participating published by Statistics Canada, indicate that tax incentives have a significant effect on charitable donation expenditures. They find that an increase in the tax credit is expected to lead to a loss of tax revenue to the public sector which would be more than fully compensated by the rise in donation expenditures. Findings indicate that donations to religious organizations are not price elastic suggesting that the tax credit may not be fiscally efficient in this sector. Their study also suggests complementarity between donating and volunteering rather than these activities being seen as substitutes. People that volunteer more tend to donate also more. It may be the case that participating in volunteer activities raises awareness of the importance of the goods and services provided by charities and non-profit organizations resulting in larger financial donations. Recognition of this relationship suggests governments can indirectly encourage donations through the support of volunteer activities.

They found that price elasticities for each of the four charitable sectors they studies is different. Hence, policy decisions made under the assumption that all donation sectors are equally affected by the tax credit may be questioned. As they state in their paper: “For instance, an increase in the tax credit is expected to lead to a rise in international donations more than social service donations, health, and religious organizations.  These results inevitably lead to normative discussions about which types of organizations provide the goods and services most valued by society. Public policy could be used to tailor tax credit rates to reflect society’s preferences and needs by setting unique tax credit rates for the different donation sectors.  For example, if the goods and services provided by social services donations are valued more highly than those provided by religious organizations, the tax credit rate for social service donations could be increased and/or reduced for religious donations.”

In closing they state: “Both provincial and federal governments have the ability to influence charitable donation expenditures by adjusting the tax credit rates. Government also has the ability to influence the expenditure levels of specific types of donations by setting individual tax credit rates for each sector for the purpose of encouraging the provision of public goods and services most valued by society. In addition, the results indicate international donations to be most responsive to potential changes in tax credits and religious giving to be least responsive, thereby suggesting the need for policy makers to be cognizant of the varying levels of responsiveness of each sector to potential changes in tax incentives.”

 Their research has recently been accepted for publication in the ISRN Economics Journal.

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