Do charitable subsidies crowd out political giving? The missing link between charitable and political contributions

In the United States, charitable contributions can be deducted from taxable income making the price of giving inversely related to the marginal tax rate. However, several other types of contributions such as donations to political organizations are not tax deductible. This paper investigates the spillover effects of charitable subsidies on political giving using five independent surveys of charitable and political giving in the United States conducted from 1990 to 2001. The results show that charitable and political giving are complements. Compared with non-donors, charitable donors are more likely to donate and give more to political organizations. Increasing the price of charitable giving decreases not only charitable giving but also the probability of giving and the amount of donations to political organizations. The implied elasticity of the amount of political contributions with respect to the tax price of charitable giving is as much as -0.88. This effect is robust under different specifications and with different sets of instrumental variables. These results highlight the positive externalities created by charitable subsidies and have important implications for economic models of political and charitable giving.