The Effect of Nonprofits' Taxable Activities on the Supply of Private Donations

Abstract

Prior research finds that private donations are sensitive to price and income effects as well as alternative sources of nonprofit financing (i.e., government grants and general commercial sales). Using a database of confidential nonprofit tax returns, we conduct the first analysis of the effect of taxable activities on the supply of private donations. We find that each additional dollar of taxable revenues crowds-out approximately $1.38 to $1.79 of private donations to charitable nonprofits, suggesting that the recent rapid expansion of nonprofits' taxable activities comes at a high cost. We do not find that donations to educational or medical nonprofits are sensitive to taxable activities. Further analysis finds that our results for charitable nonprofits are driven entirely by taxable advertising revenues, which are the only type of taxable activity currently observable to donors. This suggests that recent attempts by Congress to make nonprofits' income tax returns publicly available will result in reductions in private donations.

Keywords: nonprofits, donations, crowding-out

JEL Classification: M40, L31, L33