Price Elasticities of Charitable Giving across Donation Sectors in Canada: Is the Tax Incentive Effective?

The effectiveness of tax incentives on charitable donation expenditures in Canada is explored, and the analysis is extended to compare the effectiveness across different donation sectors. Price elasticities are estimated with data from the 2007 Canada Survey of Giving, Volunteering and Participating. Results suggest that specific charitable sectors are affected differently by Canada’s tax credit system. The findings have implications for public policy. 1. Introduction As do most governments of developed nations, the Canadian government provides a tax incentive to encourage charitable giving. There is a healthy body of literature assessing the effectiveness of tax incentive policies on charitable giving [1–10], although few Canadian studies have compared the effectiveness across the different donation sectors. The current research attempts to fill this void by exploring two facets of the effectiveness of tax incentives on charitable giving in Canada. First, it evaluates the effectiveness of tax incentives on an individual’s total donation expenditure. Second, the analysis is broadened to assess and compare the effectiveness of tax incentives across four donation sectors. Much of the existing literature is grounded in the assumption that the responsiveness of charitable giving expenditures to tax incentives is equivalent across all donation sectors, except for two studies on donation expenditures in the U.S. [2, 5] and one in Taiwan [4]. To our knowledge, this assumption has not been tested for Canadian donation expenditures, except for Hossain and Lamb [1] who examined the effectiveness of tax policy on the decision to donate across donation sectors, and Kitchen and Dalton [11] and Kitchen [12] who explored the effectiveness of tax policy on donation expenditures to the religious sector. This study tests two hypotheses. The first hypothesis is that a change in the price of the donation will affect an individual’s total donation expenditure. The second hypothesis is that the effectiveness of the tax incentive varies across donation sectors, as revealed by price elasticities. Among the past studies, there is no clear consensus on how price elasticities of charitable donations vary among the different sectors. Kitchen [12] found the demand for total charitable giving in Canada to be price elastic but price to have no effect on religious giving. Brooks [2] reported total donations and donations to the health sector to be price inelastic, and donations to the religious, education and social welfare sectors to be price elastic in the U.S. while Chang [4] found