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Higher wealth taxes equal less philanthropy—experts encourage targeted deductions as potential solution

Governments use taxes to fund the public good. Charities serve a similar role. But does the former affect the latter?

That's the question in new research from Marius Ring, assistant professor of finance at Texas McCombs, who examined how changes in tax policy influence charitable giving. By looking at data from Norway, he finds that wealth taxes significantly reduce donations. "" is published in the Review of Economics and Statistics.

"My key finding is that people give less when subject to wealth taxes," he says.

What's a wealth tax? It's a tax on net assets instead of income. In the period of the study—2010 to 2018—Norway levied a tax on household assets over 1,480,000 NOK, equivalent to $250,000.

During that period, the country began removing tax discounts on secondary homes but kept discounts on primary homes. That gave Ring and Thor Thoresen of Statistics Norway a way to compare donation behavior before and after the shift.

One widespread theory is that people would donate more in the face of higher wealth taxes. Ring calls this an acceleration effect. "If your wealth is going to be taxed away, you may prefer to give sooner rather than later," he says.

But Ring found the opposite to be true. When faced with a 1% increase in the wealth tax rate:

• People cut their donation amounts to charities by 26%.
• They were also 27% less likely to give at all.

The likely reason, he says, is that people give less because wealth taxes reduce their after-tax incomes, causing them to cut expenditures on things like charities.

Income tax deductions may aid charities

Although higher wealth taxes reduce overall giving to charities, the research suggests a way to soften the blow: allowing larger amounts of donations to be deductible under the income tax. The researchers found a 10% reduction in the after-tax price of giving—by using larger deductions to decrease the overall tax bill—increased giving by 4.4%.

Such income-tax incentives are particularly powerful, Ring found, for promoting religious giving. They're also more effective the longer they stay in place, allowing taxpayers to become better informed about them.

Ring says his main findings on how giving responds to wealth taxation are consistent with an earlier study in which he examined a different aspect of Norway's wealth tax. He found it increased personal savings. He says, "One way to save more is to give less."

Does his work mean that countries should avoid wealth taxes? Not necessarily, he says. There are many more aspects to consider, such as how wealth taxes affect economic activity.

Despite potentially crowding out some charitable giving, he says, "Wealth taxes, or capital taxation more broadly, may be a socially efficient way to finance government expenditures.

"The key question is whether tax revenues are generally spent better, in a social welfare sense, than charitable donations."