Subsidizing Charitable Contributions in the Field: Evidence from a Non-Secular Charity*
Catherine C. Eckel School of Social Sciences University of Texas at Dallas
[email protected] 972-883-4949
Philip J. Grossman Department of Economics St. Cloud State University St. Cloud, MN 56301
[email protected] 320-308-4232
* This work was supported a grant from the National Science Foundation (SBR-0136684). We would like to thank Lutheran Social Services for participating in this study. We would like to thank Jeff Carpenter, Rachel Croson, Douglas Davis and Glenn Harrison, and participants at the ARNOVA conference for their helpful comments. Thanks also go to Chris Courchane, Daniel Kos, Morgan Rasmussen, and Pastor Tim Lindhorst for helping make this project possible.
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Subsidizing Charitable Contributions in the Field: Evidence from a Non-Secular Charity
At present there are several political currents that, should they play out as proposed, could dramatically change the environment in which nonprofit and charitable institutions operate. First, the large and continuing defense expenditures and the accompanying budget deficits of the federal government coupled with recent budgetary tightness at the state and local levels have the potential to squeeze the discretionary resources available for social service programs.1 Second, a political philosophy that is gaining currency argues that the direct provision of certain categories of social services is not an appropriate government function, and that the provision of these services therefore should be shifted from government to the nonprofit sector.2 If the first trend continues and/or the political philosophy of the second continues to add adherents, the demands placed on nonprofit and charitable institutions will grow. Potentially compounding the impact of the first two trends is a third that over the past two decades has ebbed and flowed: calls for major federal income tax reform.3 Two tax reform proposals that have received media attention are a flat-rate income tax and a consumption tax. Both proposals, in their purest forms, would eliminate many, if not all, deductions that are allowed under the current tax code. Under current law, the federal government rebates, to the taxpayers who itemize deductions, an amount equal to the marginal tax rate for every dollar 1
Between 1980 and 1995, domestic discretionary spending as a percentage of GDP has trended downward from approximately 5 percent to approximately 4 percent (see http://www.cbo.gov/showdoc.cfm?index=5&sequence=11). The President’s fiscal year 2006 budget proposes further cuts in non-security discretionary spending (see Fact Sheet: Fiscal Year 2006: Keeping the Commitment to Restrain Spending. The White House, Office of the Press Secretary, December 22, 2005, http://www.whitehouse.gov/news/releases/2005/12/20051222-15.html). In 2003, states, to meet balanced budget requirements, were required to find $50 billion in savings. In 2004 the combined state budget gaps were projected to be $85 billion, 20 percent of total state expenditures (see Fiscal mess, drive to war put social services on the block, National Catholic Reporter, February 14, 2003, http://ncronline.org/NCR_Online/archives/021403/021403a.htm). 2 See for example, Reed (2002), Tanner 1996, and Olasky (1992). 3 For example, the flat-rate income tax proposal was the foundation of Steve Forbes’ presidential campaigns. 2
contributed, reducing the cost of making a dollar contribution by that rate. Removal of this subsidy would likely reduce contributions to nonprofit and charitable organizations leaving such organizations under-funded.4 Cordes (2001) estimates the budgetary cost of the charitable deduction to be almost $25 billion in 1999. Assuming public sentiment favors the continued support of nonprofit and charitable organizations and assuming support is to be directly tied to measured private support, then two options are available. One is the existing system of taxpayer rebates via the income tax system; the second is a contributions matching program, similar to corporate matching gift programs that are a common feature of corporate philanthropy.5 The subsidy method adopted should maximize the level of giving for any given subsidy cost in forgone tax revenue.6 Subsidies are a relatively common feature of economic life. Examples of rebate subsidies include the tax deduction afforded mortgage interest and charitable contributions for those who itemize and food stamps and rent subsidies provided low income households. Examples of matching subsidies are somewhat less common but include corporate matches of employee contributions to nonprofit institutions. Why different subsidy forms are used is unclear since standard economic analysis implies that, for example, a one for one match of an expenditure or donation is functionally equivalent to a rebate that returns half of the expenditure or donation. However, in laboratory experiments Eckel and Grossman (2003) found that the dollar value of 4
Barry (1996) presents arguments that such organizations will benefit from reform. He and others argue that since donations as a percent of personal income have remained relatively constant over time, and since tax reform will increase personal income, reform will lead to greater donations. These proponents apparently believe that this income effect will dominate the price effect resulting from the elimination of the deduction. 5 In its 1995, 1997, and 1999 surveys of approximately 1,000 corporations, the Council for Advancement and Support of Education (1999) reports that almost 100 percent have programs that match employee contributions to colleges and universities (at rates of up to 5 to 1). The number of corporations with matching gift programs for noneducational non-profit organizations has increased over the four years from 41 to 51 percent. A 1997/98 survey of 116 Canadian corporations reports that 56 percent administered employee matching gifts programs (Canadian Centre for Philanthropy, 1998). 6 Traditional economic models predict that a rebate subsidy of rate sr is functionally equivalent to a matching subsidy of rate sm= sr/(1 - sr). Other things equal, an individual should be indifferent between the two subsidies and the total amount received by the nonprofits would be the same. 3
the donation was significantly greater under matching subsidies than under equivalent rebate subsidies. The pattern of giving was otherwise consistent with theory; i.e., giving increased as the cost of giving declined and as income increased. This paper reports results from a field study comparing the effects of rebates and matching subsidies for charitable contributions. The study was conducted in conjunction with Lutheran Social Services of Minnesota, a religiously affiliated social services charity. The field experiment has three main treatments: a baseline with no subsidy, a rebate to donors of a portion of their contribution to the charity, and an equivalent matching contribution. Within each subsidy treatment there are two rates of subsidy: 20 and 25 percent rebates and 25 and 331/3 percent matches. We report results that for the most part validate prior laboratory experiments. These results suggest that replacing the current tax rebate system with a matching program of equal cost could increase total giving to charitable organizations. II.
Rebate versus Matching Donations in the lab It is easy to demonstrate that rebating part of a donation and matching a donation are
functionally equivalent. Assume a rebate subsidy rate of 20 percent. Giving a $1 to charity will result in the donor receiving a $0.20 rebate. In effect, it cost the giver only $0.80 out of pocket to give the charity $1. The functionally equivalent match subsidy would be 25 percent [25 = (20/(100-20)*100]. With a 25 percent match subsidy, the donor could still put $1 into the hands of the charity at a cost of only $0.80 out of pocket. Giving $0.80 will trigger the 25 percent matching contribution (i.e. an additional $0.20 = .25 X $0.80) resulting in the charity receiving $1.00 in total.
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In the laboratory experiment conducted in Eckel and Grossman (2003), each subject made a series of allocation decisions dividing an endowment between himself and a charity.7 Allocation decisions varied according to: 1) the level of the endowment, 2) the net price of donating $1 to the charity, and 3) whether donations are subsidized in the form of a rebate, a match, or not at all (see Table 1 for a selection of the allocation decisions). The overall results showed that giving was price-sensitive, increasing as the cost of giving declined, and that it was a normal good, increasing with income. The pattern of giving was consistent with economic theory, except in one respect. In every comparable case, the dollar value of the donation was significantly greater under the matching subsidy than under the rebate subsidy. For example, with an endowment of $7.50 and a price of giving of $0.75, charities received approximately 21 percent more, on average, under the matching subsidy than under the rebate subsidy. Several subsequent papers explore these results, focusing primarily on the possibility that subjects were confused or misunderstood the experimental protocol in some way. These studies vary the frame of the decision by adding more information, simplifying the decisions subjects have to make, and moving the decision to a private-good context. Davis, Millner, and Reilly (2005) give subjects additional information about the consequences of their actions in table form, and their results show a diminished difference in the impact of the two subsidies. Their treatment presents the information in a way that highlights equivalence, and subjects treat the decisions as more similar. Eckel and Grossman (2006b) conducted a series of experiments where each subject sees only one type of decision (i.e., subjects make decisions under only rebate or only match subsidies), rather than the menu of choices of both type offered to subjects in both Eckel and Grossman (2003) and Davis, Millner, and Reilly (2005). This frame more
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The dictator game is not a strategic game at all, but an allocation exercise. One party, the dictator, is asked to determine the division of a given sum of money between himself and a respondent (in this case, the chosen charity). 5
closely approximates decision making in the field, where donors typically face at most one subsidy type. Rather than diminishing the difference in response, this between-subjects approach produced larger differences in response to the two subsidies. In Eckel and Grossman (2006a) the authors simplified the experiment even further. Here subjects were given an initial endowment of $20 and asked to choose between the simplest possible representations of the two subsidies: receiving a 50 percent rebate or a 100 percent match on any contribution made. While equal numbers of subjects chose each subsidy type, contributions were again significantly greater for those selecting the match subsidy than from those selecting the rebate subsidy. Davis and Millner (2005) extend the rebate/match framework to a more familiar context, the purchase of a private good (chocolate bars). Their result that participants purchase more chocolate bars under the match offers than under the strategically equivalent rebate offers shows that the effect is not context-specific.8 III. Field Study Procedures Field decisions differ in important ways from lab experiments, and a choice between the two approaches to the study of decision making involves tradeoffs. The lab experiments conducted above allow for a great deal of control over the decision environment, but at a cost. Lab decisions are necessarily artificial in some respects. While the lab experiments use real money, and subjects make real allocations of that money between themselves and real charities, still they are making decisions with “house money” provided by the experimenter, and in an environment where they know their decisions will be observed. Harrison and List (2004, p. 1012) identify six dimensions on which lab and field experiments can differ:
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They suggest such a preference may have arisen because of past negative experiences with rebates; rebates are less certain, have higher transactions costs, and, for mail-in rebates, represent future rather than immediate payment. 6
1. the nature of the subject pool, 2. the nature of the information that the subjects bring to the task, 3. the nature of the commodity 4. the nature of the task or trading rules applied, 5. the nature of the stakes, and 6. the nature of the environment that the subject operates in. The important differences for our study are 1, 2, 5, and 6. The subject pool is adults of all ages and income levels, instead of university students. Donors probably know more about the activities of the charity than the descriptions we provided the lab subjects. Decisions are made using their own money instead of ours, and generally involve contributions that are larger than the lab-provided stakes. And the environment is a natural one, rather than the artificial environment of the lab. The field study was conducted with the cooperation of Lutheran Social Services (LSS) as part of regular LSS mailed fund-raising drives. Mailings were conducted in November/December 2003 and May – July 2004. Included in the usual LSS mailed solicitation was a flyer announcing either a rebate or a matching offer (see Appendix for examples of the flyers).9 The flyer, about 1/3 of a normal page in size, provides details of the offer and a request to complete and return an enclosed survey, which collected socio-economic data, a subject’s pattern of charitable giving, and a measure of the subject’s perceived benefits from the charity. To encourage recipients to complete the survey, the recipients are informed that $5 would be donated to LSS for every completed survey. Budget limitations required the overall maximum paid out in rebates, matches, and survey incentives to be capped. The subsidy specific caps --
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No flyers were included in solicitations mailed to the no-subsidy donors. 7
20% rebate: $5,000; 25% match: $10,000; 25% rebate: $8,000; and 331/3% match: $15,000 -- are stated on the respective flyers.10 The solicitation also included a donor card on which donors indicated their contribution. The usual LSS donor card was amended to include a check box that donors were required to mark if they wished to receive the particular subsidy. The check box was included to ensure that donors were aware of the subsidy possibility, and, if not, to draw their attention to the enclosed flyer. Thus we know whether the subsidy was taken into consideration when the decision was made.
IV. Results A total of 24,116 solicitations were mailed with 1,428 useable responses received, an overall response rate of 5.9 percent.11 The five price/subsidy-type categories, number of mailings by each category, and response rates are: 1) $1.00/no subsidy (number of mailings = 5,501, response rate = 6.5%); 2) $0.80/20% rebate (4,463, 6.4%); 3) $0.80/25% match (4,856, 5.3%): 4) $0.75/25% rebate (4,462, 5.4%); and 5) $0.75/331/3% match (4,834, 6.1%).12 In general, the responses rates did not differ significantly (p-value < 0.05) across the different price/subsidy categories (see Table 2), with three exceptions: the $0.80/20% match category response rate differed significantly from the response rates for the no subsidy category and the
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The caps are the same used in the Minnesota Public Radio field survey (Eckel and Grossman, 2005), which were estimated based on information provided by MPR on average contributions and response rates. In this case, however, they were generous and in no instance did the cap prove binding. 11 Ninety responses were deleted from the sample because they could not be accurately allocated to any of the five price/subsidy categories. For example, a donor may have used a form from an earlier LSS solicitation. An additional 34 responses were deleted because they either lacked information on donation amounts or whether or not the donors accepted the offered subsidies. 12 The timing and scope of the Nov/Dec solicitation was new for LSS so there is no basis of comparison for the overall response rate. 8
$80/20% rebate category; and the $0.75/25% rebate categories differed significantly from the the $1.00/no subsidy.13 In Table 3 we report, by price/subsidy categories, the 1,428 useable responses broken down by non-donors and donors. We also show for donors, whether or not they checked the box to accept the offered subsidy. Twenty seven percent of all useable responses had donations of $0. No-subsidy subjects were the most likely to give nothing; 33 1/3 percent match subjects were the least likely to give nothing. The proportion of subjects offered the 33 1/3 percent match who gave $0 is significantly (p $0 Donation = $0 (% of total) Did not check Checked Box box (% of total) (% of total) 107 252 (29.8%) (70.2%) 77 129 78 (27.1%) (45.4%) (27.5%) 73 48 136 (28.4%) (18.7%) (52.9%) 70 109 62 (29.0%) (45.2%) (25.7%)
Percentage of donors with checked box
NA 37.7% 0.001 73.9%
25% Match
257
25% rebate
241
33 1/3% Match
287
59 (20.4%)
69 (24.0%)
159 (55.4%)
69.7%
Total
1,428
386 (27.0%)
355 (33.2%)*
435 (40.7%)*
55.0%
36.3% 0.001
* - percentages based on useable responses for subsidy categories only (1,069)
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Fisher Exact Test p-value (acceptances)
Table 4: Mean Revenue per Solicitations and Mean (Out of Pocket) Donations by Subsidy Categorya
(1)
Solicitations (2)
Mean Revenue per Solicitation (3)
20% Rebate
4,463
$2.27
25% Match
4,462
$2.77
25% Rebate
4,856
$1.92
33 1/3% Match
4,834
$3.59
No Subsidy
5,501
$2.28
All
24,116
$2.57
All Useable Respondents Mean Means Test Donation t-statistic (Std. Dev.) (p-value
