The Effects of Federal Estate Tax Policy on Charitable Contributions

Tax policy encourages charitable contributions during an individual’s life through both the personal income tax and the estate tax. The effect of the income tax on contributions is well known. Because annual charitable contributions reduce the size of an estate, and hence the likely estate tax burden, the estate tax should also affect contributions. Recently, Auten and Joulfaian (1996) studied that issue using the tobit method on 1982 Statistics of Income data and found that the estate tax significantly increases charitable contributions. In this study, we estimate a similar model and find similar results when using a tobit. However, our model is estimated using Health and Retirement Study (HRS) data for 1991. With those data, the errors obtained from the tobit violate the censored normal distribution required for consistent estimation, and so we use the more robust symmetrically trimmed least squares technique. The HRS data also allow us to calculate the individual’s subjective life expectancy. Using several scenarios of asset growth and those life expectancies, we estimate the estate tax burden that an individual might expect to face. In addition, our estimation controls for the effect on contributions of behavior such as volunteering and attendance at religious services—behavior that cannot be observed through tax data. We find that the existence of the tax has a small but statistically significant effect on annual charitable contributions regardless of the assumed rate of growth of assets.