Voluntary Giving and Economic Growth: Time Series Evidence for the US

Given the substantial consolidation pressure in tax dependent government budgets, voluntary contributions play an increasing role in the financing of activities related to welfare, culture or education. There is hope that voluntary giving may at least partially become a stable substitute for tax financing. Tax revenues are highly sensitive to economic growth and the business cycle. Hence, a first question arises as to which extent voluntary giving is equally sensitive to the business cycle. Insofar it is less elastic compared to taxation it might contribute to a more stable financing of public goods over the business cycle. A second question relates to the long-run impact of trend growth on giving and to the extent to which giving benefits from the augmentation of an economy’s economic resources. If the long-run growth elasticity of aggregate giving is large, this result would point to a yielding source of finance whose importance can be expected to grow with an expanding economy. Therefore, this paper analyzes the sensitivity of aggregate giving to both business cycle developments and trend growth. In this respect it contributes to fill a blank spot in the charitable giving literature. The study applies time series modeling which follows approaches developed to analyze the tax revenue-growth-nexus. This cointegration modeling takes account of a possible long-run link between income and giving which may temporarily interfere with cyclical fluctuations. The resulting error correction specification allows disentangling the short-run (business cycle related) from the long-run (potential growth related) income elasticity. These tools are applied to data on US giving for a forty-year period (1968-2008) for the aggregate of total giving and for its subcomponents (individual, corporate, foundation giving, and charitable bequests). With tax revenues as a point of reference, US giving constitutes indeed a relatively stable source of revenue. Total giving is characterized by a business cycle volatility which is comparable to the moderate one of indirect taxes. However, this overall finding is composed of the respective sub-components’ very different short-run GDP-elasticities. Whereas individual and in particular corporate giving is quite sensitive to cyclical fluctuations, foundation giving and charitable bequests tend to stabilize total giving over the business cycle. This cyclical buffer function of charitable bequests and foundation giving has so far been overlooked in the literature. The results for nominal (and even more for real) long-run growth also paint a favourable picture: giving benefits in or even above proportion from an augmentation of economic resources in an economy. This holds for foundation giving in particular which is highly elastic to nominal and real long-run growth. The comparison of the finding to the well researched micro-elasticities points to the possible existence of social multipliers in the case of US giving: the macro estimates for the income elasticities lie in the upper band of the micro estimates. This is consistent with a social multiplier view according to which individual giving is mutually reinforcing.

Heinemann, Friedrich (2010), Voluntary Giving and Economic Growth: Time Series Evidence for the US, ZEW Discussion Paper No. 10-075, Mannheim.