Tax Incentives and Household Behaviors: The Cases of Charitable Contributions and Retirement Savings

Abstract

To determine whether and to what extent a tax policy affects individuals` behaviors necessitates a reliable empirical investigation. However, in some cases, to analyze taxation empirically is more difficult than to analyze it theoretically because we encounter several econometric difficulties and data limitations. In chapter 1, I discuss three main econometric problems encountered when economists attempt to estimate individuals` responses to tax policies: the identification problem, the endogeneity problem, and the omitted variable problem. I outline how they will affect the estimation results and list several alternative solutions to overcome these problems. I apply the methodology discussed in chapter 1 to the studies of charitable contributions and retirement savings. In chapter 2, I point out that the conventional assumption of a constant appreciation ratio of noncash giving will bias the tax price of giving. I propose a proxy variable to alleviate this bias. This method not only allows individuals to have different appreciation ratios of noncash giving, but also increases the variation of the tax price of giving. The results show that cash giving and noncash giving are substitute goods; besides, marital status and number of dependents have opposite effects on individuals` decisions of cash giving and noncash giving. In chapter 3, I employ the difference-in-difference approach and our modified first-differenced model, using an exogenous change in tax rates from a natural experiment, to estimate the tax price effect on charitable contributions. My results indicate that the tax price of giving is still a negative determinant on charitable contributions, but it has a more significantly negative impact on individuals` giving decisions in terms of the change in giving, not the level of giving. In chapter 4, I utilize the difference-in-difference approach to estimate the effectiveness of saving incentive programs on private saving, taking the help of a natural experiment conducted in 1998, the year Roth IRAs were introduced to individuals. In addition to the comparison of private saving between Roth IRAs eligibles and ineligibles, computed according to the tax codes, I suggest anther definition for the control group and the treatment group based on economic perspectives to estimate the saving effects of Roth IRAs. The empirical results indicate that people would have saved even less if Roth IRAs had not been available in 1998; thus, Roth IRAs provide a positive incentive for private saving. However, this saving effect would be overstated if we simply compared private saving between Roth IRAs eligibles and ineligibles. Chapter 5 concludes this research.