How Do Nonprofit Firms Respond to Tax Policy?

What is it about?

Government tax subsidies encourage donors to support charity more generously. But charities may themselves change their behavior in response to tax changes. In this paper, I find that when government increases its support for charitable contributions, charities also increase the money they spend on fundraising. Some of the government's subsidy, in other words, is used up by fundraising. I also find that charities rely more on "dues" and direct grants when tax subsidies dry up, and that as a result charitable spending is not that responsive to tax subsidies.

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Why is it important?

This is the first project to connect tax subsidies with nonprofit behavior. It suggests that the charitable contribution deduction may be less effective than we thought before, or effective in different ways.