The Effect of Tax Policy
on Charitable Contributions: The Case of Nonitemizing Taxpayers
Amy Dunbar and John Phillips
This research examines the effectiveness of the nonitemizer charitable
deduction in 1985 and 1986 to provide insight on the impact of tax
policy on the philanthropic behavior of taxpayers who do not itemize
deductions. Besides helping resolve a conflict in prior research
concerning the deduction’s effectiveness, evaluating this tax provision
provides policy makers with evidence that could assist in the design
of charitable contribution provisions that may apply to nonitemizers
in the future. Using data from the 1985 and 1986 SOI Model Files,
we first estimate the traditional levels model of giving for both
years and find evidence consistent with the nonitemizer provision
stimulating giving in both years. Next, we estimate Broman’s (1989)
changes model for a common panel of nonitemizers and provide evidence
supporting the argument that the nonitemizer provision was an efficient
tax subsidy. The evidence also suggests that the elimination of
the limitation on the nonitemizer deduction in 1986 stimulated additional
giving and prompted 1985 nongivers to become givers in 1986. Our
results are robust to alternative explanations of tax planning and
Costly False Detection
Errors and Taxpayer Rights Legislation: Implications for Tax Compliance,
Audit Policy and Revenue Collections
In July 1996, Congress passed the Taxpayer Bill of Rights 2 (T2).
T2 resulted from a series of initiatives aimed at protecting honest
taxpayers, particularly those affected by Internal Revenue Service
(IRS) enforcement actions. This study incorporates taxpayer rights
considerations into a strategic model of reporting and auditing,
and examines the effect of false detection and costly error correction
on taxpayer equity, tax evasion, and revenue collections. The model
also considers proposals to shift honest taxpayer costs to the tax
authority. The study finds that: (1) tax evasion can be deterred
completely, but only at honest taxpayers’ expense, (2) costly false
detection errors increase tax authority revenue collections in some
cases, and (3) although tax authority reimbursement of honest taxpayer
costs can restore equity, it also may increase evasion, producing
additional revenue loss. These results highlight the trade-off between
detecting evasion and protecting taxpayers’ rights. The study also
provides insight to policy makers for balancing taxpayers’ rights,
revenue needs, and cost considerations.
The Capital Gains Tax
and Stock Market Returns
Robert Ricketts and Craig White
This paper discusses the impact that investor reaction to changes
in capital gains tax rates may have on pre-tax market returns and,
therefore, accrual of future taxable capital gains. Since investors
focus on after-tax returns, market forces should work to maintain
relatively stable after-tax returns, taking into account differences
in risk and changes in economic conditions. This study analyzes
monthly pre-tax rates of return in the Dow-Jones Industrial Average,
S&P 500 Composite Index, and NASDAQ Composite Index during periods
covered by the Revenue Act of 1978, Economic Recovery Tax Act of
1981, and the Tax Reform Act of 1986. The maximum capital gains
tax rate in each of these periods was 28, 20, and 28 percent, respectively.
Accordingly, we would expect returns to be higher during the pre-1981
and post-1986 periods, when capital gains tax rates were highest.
Our results are consistent with these expectations, however, only
for returns on the NASDAQ index. For the S&P 500 index, returns
were higher in the pre-1981 period than in the 1981-1986 period,
but differences between 1981-1986 and post-1986 returns were not
statistically distinguishable at generally accepted levels of confidence.
No statistically distinguishable differences were observed across
any of the periods tested on the Dow-Jones index.
Transfer Pricing and the
Persistent Zero Taxable Income of Foreign-Controlled U.S. Corporations
Julie Collins, Deen Kemsley, and Doug Shackelford
Grubert, Goodspeed, and Swenson (1993) document a persistence of
foreign-controlled domestic corporation taxable income around zero
which has been interpreted by many, including tax policymakers,
as suggesting transfer pricing. We examine foreign-controlled domestic
corporations (FCDCs) within the wholesale trade industry from 1981
to 1990 to determine if this prevalence of near-zero taxable income
is linked to manipulation of transfer prices on inventory purchases.
We find no difference in the relation between sales and gross profit
between near-zero FCDCs and near-zero control companies that are
uncontaminated by cross-jurisdictional income shifting manipulation.
Our inability to document transfer price manipulation by investigating
an industry and the accounts where manipulation is alleged to be
most egregious suggest that previous inferences of transfer price
manipulation based on the persistence of foreign-controlled U.S.
corporation taxable income around zero are premature.