When ling an income tax return, one can claim a deduction for charitable contributions. Let's simplify the
Question:
When ling an income tax return, one can claim a deduction for charitable contributions. Let's simplify the income tax system and assume that the tax is proportional to the level of taxable income (income after deductions).
(a) Suppose we increase the marginal income tax rate. An economic adviser claims that the effect of this tax change on the amount of charitable contributions is uncertain. Plot a simple graph that illustrates this situation (it involves the choice between charitable contributions and other spending), use it to explain why the effect is uncertain and explain what it depends on.
(b) Now suppose that we instead increase the marginal tax rate but also provide a transfer that makes the bundle that used to be optimal before tax increased just a affordable. According to the economic adviser this policy change will make people contribute more to charity. Why?
Expert Answer:
When there is a consideration in increase of the marginal income tax raid which can be the economic ... View the full answer
