The Cost of Requiring Charities to Report Financial Information

Marx, Benjamin M. (2018): The Cost of Requiring Charities to Report Financial Information.

Abstract

Taxes and regulations, such as labor laws and reporting requirements, often exempt small firms, creating incentives to stay small or delay growth. Firms' responses to such size thresholds provide an opportunity to empirically assess consequences of regulations and firms' willingness to pay to avoid them. This paper provides a theoretical model for evaluating welfare effects of moving such thresholds. It then analyzes an income notch at which IRS reporting requirements for charitable organizations become more onerous. Standard bunching estimates imply that the average charity will reduce reported income by $750 to $1000 to avoid filing the more onerous information return. Panel data methods show that an even larger share of charities fail to appear when first required to report more information. There is some evidence of retiming of income to delay growing above the notch, but a long-run reduction in the share that grow above the notch provides evidence of real responses as well. Relatively low-expense and low-asset charities are most likely to reduce reported income to stay below the notch, while charities with past receipts above the notch do not manipulate income, suggesting the report imposes an adjustment cost on new filers.

• Item Type: MPRA Paper
• Language: English
• Keywords: charity, information, reporting, regulation, avoidance, compliance, bunching
• Subjects: D - Microeconomics > D6 - Welfare Economics > D64 - Altruism ; Philanthropy; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion and Avoidance; L - Industrial Organization > L3 - Nonprofit Organizations and Public Enterprise > L38 - Public Policy

References

Acemoglu, Daron and Joshua D. Angrist, “Consequences of Employment Protection? The Case of the Americans With Disabilities Act,” Journal of Political Economy, 2001, 109(5), 915–957.

Andreoni, James, “Philanthropy,” Handbook on the Economics of Giving, Reciprocity and Altruism, 2006, 1, 1201–1269.

Angelini, Paolo and Andrea Generale, “On the Evolution of Firm Size Distributions,” American Economic Review, 2008, 98(1), 426–438.

Barreca, Alan I., Melanie Guldi, Jason M. Lindo, and Glen R. Waddell, “Saving Babies? Revisiting the effect of very low birth weight classification,” The Quarterly Journal of Economics, 2011, 123 (4), 2117–2123.

Blumenthal, Marsha and Laura Kalambokidis, “The Compliance Costs of Maintaining Tax Exempt Status,” National Tax Journal, 2006, 56, 235–52. and , “The Compliance Costs of Maintaining Tax Exempt Status,” National Tax Journal, 2006, 56, 235–52.

Cabral, Luis M. B. and José Mata, “On the Evolution of the Firm Size Distribution: Facts and Theory,” American Economic Review, 2003, 93(4), 1075–90.

Chetty, Raj, John N. Friedman, Tore Olsen, and Luigi Pistaferri, “Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records,” The Quarterly Journal of Economics, 2011, 126, 749–804.

DellaVigna, Stefano, James A. List, and Ulrike Malmendier, “Testing for Altruism and Social Pressure in Charitable Giving,” The Quarterly Journal of Economics, 2012, 127(1), 1–56.

Dharmapala, Dhammika, Joel Slemrod, and John Douglas Wilson, “Tax policy and the missing middle: Optimal tax remittance with firm-level administrative costs,” Journal of Public Economics, 2011, 95, 1036–1047.

Diamond, Peter, “Optimal tax treatment of private contributions for public goods with and without warm glow preferences,” Journal of Public Economics, 2006, 90 (4-5), 897–919.

Dixon, Peter B., Mark R. Picton, and Maureen T. Rimmer, “Payroll Taxes: Thresholds, Firm Sizes, Dead-Weight Losses and Commonwealth Grants Commission Funding,” The Economic Record, 2004, 80(250), 289–301.

Fack, Gabrielle and Camille Landais, “The effect of Tax Enforcement on Tax elasticities: Evidence from Charitable Contributions in France,” Journal of Public Economics, 2016, 133, 23–40.

Fack, Gabrielle and Camille Landais, Philanthropy, Tax Policy and Tax Cheating: A Long Run Perspective on US Data, Oxford University Press, 2016.

Froelich, Karen A. and Terry W. Knoepfle, “Internal Revenue Service 990 Data: Fact or Fiction?,” Nonprofit and Voluntary Sector Quarterly, 1996, 25(1), 40–52.

Garicano, Luis, Claire Lelarge, and John Van Reenen, “Firm Size Distortions and the Productivity Distribution: Evidence from France,” American Economic Review, 2016, (106), 3439–3479.

Gourio, François and Nicolas A. Roys, “Size-Dependent Regulations, Firm Size Distribution, and Reallocation,” Quantitative Economics, 2014, (5), 377–416.

Greenstone, Michael, Paul Oyer, and Annette Vissing-Jorgensen, “Mandated Disclosure, Stock Returns, and the 1964 Securities Acts Amendments,” The Quarterly Journal of Economics, 2006, 121 (2), pp. 399–460.

Hsieh, Chang-Tai and Benjamin A. Olken, “The Missing ”Missing Middle”,” Journal of Economic Perspectives, 2014, 28 (3), 89–108.

Iliev, Peter, “The Effect of SOX Section 404: Costs, Earnings Quality, and Stock Price,” The Journal of Finance, 2010, 65, 1163–1196.

Internal Revenue Service, “IRS Data Book, Publication 55b,” Technical Report 1998-2005.

Internal Revenue Service, ““2007 Instructions for Form 990 and Form 990-EZ,” 2007.

Keen, Michael and Jack Mintz, “The Optimal Threshold for a Value-Added Tax,” Journal of Public Economics, 2004, 88, 559–576.

Kleven, Henrik J. and Mazhar Waseem, “Using Notches to Uncover Optimization Frictions and Structural Elasticities: Theory and Evidence from Pakistan,” Quarterly Journal of Economics, September 2013, 128(2), 669–723.

Kleven, Henrik J. and Wojciech Kopczuk, “Transfer Program Complexity and the Take-Up of Social Benefits,” American Economic Journal: Economic Policy, 2011, 3(1), 54–90.

Kline, Patrick and Melissa Tartari, “Bounding the Labor Supply Responses to a Randomized Welfare Experiment: A Revealed Preference Approach,” NBER Working Paper No. 20838, January 2015.

Marx, Benjamin M., “Has Regulation of Charitable Foundations Thrown the Baby Out With the Bath Water?,” Journal of Public Economics, September 2015, 129, 63–76.

Marx, Benjamin M., “Dynamic Bunching Estimation with Panel Data,” MPRE Paper 88647, 2018.

National Center for Charitable Statistics, “Guide to Using NCCS Data,” August 2006.

Onji, Kazuki, “The Response of Firms to Eligibility Thresholds: Evidence from the Japanese Value-Added Tax,” Journal of Public Economics, 2009, 93, 766–775.

Roeger, Katie L., Amy Blackwood, and Sarah L. Pettijohn, “The Nonprofit Almanac 2012,” Technical Report, Urban Institute Press 2012.

Slemrod, Joel, “A General Model of the Behavioral Response to Taxation,” International Tax and Public Finance, 2001, 8(2), 119–128.

Slemrod, Joel, “Buenas Notches: Lines and Notches in Tax System Design,” 2010. University of Michigan, mimeo.

Slemrod, Joel and Marsha Blumenthal, “Measuring Taxpayer Burden and Attitudes for Large Corporations,” Technical Report, Report to the Coordinated Examination Program of the Internal Revenue Service 1993.

Slemrod, Joel and Varsha Venkatesh, “The Income Tax Compliance Costs of Large and Mid-Sized Businesses,” Technical Report, Report to the Internal Revenue SErvice Large and Mid-Size Business Division 2002.

St.Clair, Travis, “How Do Nonprofits Respond to Regulatory Thresholds: Evidence From New York’s Audit Requirements,” Journal of Policy Analysis and Management, 2016, 35, 772–790.

Yelowitz, Aaron S., “The Medicaid Notch, Labor Supply, and Welfare Participation: Evidence from Eligibility Expansions,” The Quarterly Journal of Economics, 1995, 110 (4), pp. 909–939.