What Drives Giving in Extensive Welfare States? The Case of Germany

Economic approaches explain charitable contributions by assuming that donors are interested in the provision of certain public goods by the respective charity. Indeed, many individuals donate money or time to non-profit-organizations. This is especially true for the US which are often perceived as having a highly developed culture of giving. Accordingly, a lot of empirical research on the phenomenon of private charitable contributions in the US exists. For countries with a strong tradition of an extensive welfare state and tax-financed provision of public goods by the public sector, far less is known. Due to the different institutional background it cannot be taken for granted that the results which have been derived for the US are valid for countries with larger welfare states. To obtain some first empirical insights on the mechanisms underlying private charitable contributions in extensive welfare states, we estimate the reaction of donations to changes in income and price, i.e. the income and price elasticities of giving, in Germany. Due to the tax deductibility of private donations, the price of giving may be expressed as (1-m), with m being the marginal income tax rate. We use a sample of 2,743 income tax returns from the German Taxpayer Panel which covers the years 2001 to 2003. The tax return data contains information on the amount of donations made by those individuals that decide to benefit from the tax deductibility of charitable contributions. Furthermore, the panel offers several socioeconomic variables, such as sex, age, religious affiliation, and marital status. In our estimations we take the selection process inherent in making charitable contributions explicitly into account because in about 65 % of the income tax returns no donations are declared. Our estimates show a rather unelastic reaction of donations to changes in income: If income goes up by 1 %, donations increase on average by only 0.74 %. The reaction to price changes, however, is elastic: A 1 % decrease in price raises charitable contributions by 1.38 % to 1.54 %. This indicates that the income tax schedule has a significant impact on the decision to donate. For practical tax policy this means that the tax incentives for charitable contributions in the form of a tax deduction are effective. If compared to those studies for the US that apply the same estimation strategy, our results suggest no significant differences between elasticities in Germany and the US. Thus, income and tax incentives seem to affect giving in a comparable way in both countries, indicating that similar mechanisms underlying the act of giving are at work, even in countries with highly different welfare state traditions.

Borgloh, Sarah (2008), What Drives Giving in Extensive Welfare States? The Case of Germany, ZEW Discussion Paper No. 08-123, Mannheim.