Michael J. Boskin, Martin Feldstein, Effects of the Charitable Deduction on Contributions by Low Income and Middle Income Households: Evidence From the National Survey of Philanthropy, The Review of Economics and Statistics, Vol. 59, No. 3 (Aug., 1977), pp. 351-354

Few issues in public finance stir as much academic debate or public discussion as the appropriate taxation of income from capital. Prescriptions and practices in various countries range from heavier taxation of capital than labor income to subsidization of investment. A variety of features of the current U.S. tax system differentially tax capital income relative to labor income, and certain types of capital income relative to other types. Important examples include the separate corporate income tax, the maximum tax on earned income, the treatment of pensions and life insurance, and the nontaxation of imputed income. In recent years much insight has been gained into several important issues in analyzing capital income taxation. Applications of the theory of optimal taxation have helped clarify the determinants of the optimal taxation of capital income, new empirical results have questioned long-held beliefs about the effects of capital income taxation on private saving and investment, and careful study has elucidated the complex nature of the incentives involved in the various special features of our current tax laws. This paper presents a summary of some recent results in this area of public finance. Toward this end, Section I presents a heuristic discussion of the application of optimal tax theory to the taxation of capital income. We note that efficiency may require something other than a convex combination of income and consumption taxation. Optimality might imply heavier taxation of capital income than in an income tax, on the one hand, or an interest income subsidy, on the other. The key parameters in answering this question are the ownand cross-compensated current and forward price effects on consumption and leisure at different stages of the life cycle. Section II discusses a variety of features of the current U.S. tax system which deal with capital income. Of particular interest are the separate corporate tax, the lack of price level indexing, the deductability of interest payments and the marginal finance decision, and the opportunity to save in some forms free of personal taxes. We conclude that the U.S. tax system, while often taxing capital income quite heavily, is in many respects a hybrid of an income and expenditure tax. Section III reviews some recent empirical research which suggests that private saving may be somewhat more responsive to the real after-tax rate of return than previously conjectured, and Section IV offers a brief conclusion and discusses (in light of the analysis in the paper) some policy issues and options currently under serious consideration.

We analyze detailed longitudinal data on a cohort of males aged 58–67 in 1969–1973, a period of substantial increases in real Social Security benefits. We find the following: (1) the accelerating decline in labor force participation of elderly men in 1969–1973 can be explained by the large increase in real Social Security benefits; (2) there is evidence of a liquidity constraint effect for an important subgroup of the elderly; (3) the magnitude of this induced retirement effect is large enough that ignoring it can lead to serious underestimation of the fiscal implications of changes in benefit provisions. Our results are interpreted in the historical context of a particular cohort undergoing major, unanticipated transfers of wealth; the steady-state effects of Social Security on retirement may not be the same.