Using an econometric model of charitable giving and a ten-year panel of tax return data, the author finds that previous studies have underestimated the effects of permanent income and overestimated those of permanent changes in tax prices. The significant statutory tax changes that occurred during the 1980s, especially in 1986, serve to identify the key model parameters. The author's results imply that people smooth their giving when transitory income changes but also time their giving to exploit transitory changes in tax prices. The results also raise questions about how effectively the tax incentives permanently influence the level of charitable giving by individuals.

The error Components regression model is now widely applied in econometics and statistics. Given the potentially high costs of incorrectly excluding the component from the model, an error components test should have high power. In addition, if a test is to gain acceptance from practitioners, the test should be computed easily. To obtain improved critical-value approximations, we introduce a standardized Lagrange multiplier (SLM) test statistic, which is centered and scaled to have a zero mean and unit variance under the null hypothesis. We also examine the F test, which is easily computed and has a well-known exact distribution under the null hypothesis if the regression errors are normally distributed