The Price Elasticity of Charitable Deductions: Evidence from UK Tax Records

This paper estimates the responsiveness of charitable donations to tax incentives using an administrative panel of UK income tax returns for the period 2005-2013. We exploit the 2010 tax reform, which increased marginal tax rates for high-income taxpayers and hence reduced their tax-price of giving. Using a two-step selection correction model to deal with censoring, we estimate the intensive and extensive-margin price elasticities of giving, finding an overall elasticity close to -1. The results are robust to the use of alternative estimation methods, such as panel fixed effects and Poisson regression. We analyze the welfare and policy implications of the results deriving a new theoretical framework.