Does Understanding Tax Laws Reduce Charitable Giving? A Study of Tax Literacy and Unintended Consequences*

Advances in Taxation

ISBN: 978-1-80043-327-4, eISBN: 978-1-80043-326-7

ISSN: 1058-7497

Publication date: 9 December 2020

Abstract

This paper uses two studies to examine taxpayers' knowledge of tax incentives for charitable giving and also explores the consequences of this knowledge on charitable giving decisions. The first study surveys 600 US taxpayers to establish a baseline understanding of how making a charitable contribution affects taxpayers. In the second study, we conduct an experiment with 201 US taxpayers in which we manipulate the knowledge of taxpayers by providing an educational intervention; we also measure, if, how much is donated in a hypothetical scenario under various tax deductibility conditions. The first study indicates fewer than half of participants understand the basic principles of how charitable donations affect tax liability. Our second study reveals that a short educational video is extremely effective at improving taxpayers' understanding and helping them accurately estimate the tax benefit associated with charitable giving. However, through moderated mediation analysis, we also show that participants who received this educational intervention and accurately estimated the tax benefits in turn decreased their charitable giving. We conclude that the majority of US taxpayers do not understand whether they benefit from certain deductions and may be overestimating the benefit they receive from charitable giving, resulting in giving more than they intend.

Keywords

Acknowledgements

Acknowledgments

We appreciate the helpful comments on our instrument from Bonnie Brown, Jonathan Farrar, Susan Jurney, Joleen Kremin, Ethan LaMothe, Mary Marshall, Robin Radtke, Tim Rupert, Kim Schmitt, Joe Schmitt, Charlie Thornton, and Joe Ugrin. Cass Hausserman acknowledges a grant from the School of Business Administration at Portland State University; Amy Hageman acknowledges a summer research grant from the College of Business Administration at Kansas State University. We also acknowledge the invaluable insight from Donna Bobek Schmitt.

Citation

Hageman, A. and Hausserman, C. (2020), "Does Understanding Tax Laws Reduce Charitable Giving? A Study of Tax Literacy and Unintended Consequences* ", Hasseldine, J. (Ed.) Advances in Taxation (Advances in Taxation, Vol. 28), Emerald Publishing Limited, pp. 33-72. https://doi.org/10.1108/S1058-749720200000028002

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