Governments collect taxes to finance the public good, from education and infrastructure to healthcare and social services. Charities, though operating outside the formal machinery of the state, serve parallel functions — addressing social needs, reducing inequalities, and supporting vulnerable populations. Yet an intriguing question arises at the intersection of public and private welfare: do higher government taxes, particularly those targeting personal wealth, reduce individuals’ inclination to give? That’s precisely the issue examined in a recent study by Marius Ring, assistant professor of finance at the Texas McCombs School of Business, in collaboration with Thor Thoresen of Statistics Norway.

The research focuses on Norway, a country with a longstanding wealth tax — a levy not on income but net assets. From 2010 to 2018, Norway taxed households on assets exceeding 1,480,000 NOK (approximately $250,000). During this period, the government altered the tax treatment of real estate, removing discounts on secondary homes while maintaining them on primary residences. This policy shift created a natural experiment, allowing Ring and Thoresen to examine charitable behaviour before and after the change. Their analysis yielded a compelling and perhaps counterintuitive conclusion: wealth taxes appear to discourage, not encourage, philanthropic donations.

One theory in philanthropic economics posits that higher wealth taxation might stimulate giving — a phenomenon known as the acceleration effect. The idea is that when individuals expect more of their assets to be taxed in the future, they may choose to donate sooner while they still control more of their wealth. As Ring explains, “If your wealth is going to be taxed away, you may prefer to give sooner rather than later.” In theory, this approach would allow donors to allocate funds according to their values rather than leaving them to be redirected through state expenditure. However, the Norwegian data did not support this hypothesis.

Instead, the researchers observed a pronounced adverse effect. A mere one per cent increase in the wealth tax rate resulted in a 26% reduction in the average amount donated to charities. Moreover, individuals became 27% less likely to donate at all. According to Ring, this reaction stems from a straightforward economic mechanism: increased wealth taxes reduce after-tax wealth, constraining discretionary spending. Often seen as voluntary or non-essential, philanthropic contributions are among the first expenditures to be curtailed when financial flexibility diminishes. The data underscores how personal giving is intimately tied to perceptions of economic security and disposable assets.

While the research indicates that higher wealth taxes suppress overall giving, it also points to possible policy solutions to mitigate these effects. Chief among them is the strategic use of income tax deductions for charitable donations. When individuals can offset more donations against their income taxes, lowering the effective cost of giving, they respond positively. The study found that a 10% reduction in the after-tax price of giving led to a 4.4% increase in donation levels. These incentives were especially potent regarding religious contributions and became even more effective over time as taxpayers became increasingly aware of and accustomed to the benefits.

This interplay between taxation and giving is part of a broader tension in public finance: how to raise the funds necessary for public welfare without inadvertently weakening civil society. Ring’s earlier research supports that wealth taxes prompt more cautious financial behaviour overall. In a previous study, he demonstrated that such taxes led to increased personal savings — and, by extension, a decrease in external financial commitments such as donations. “One way to save more is to give less,” he summarises. This finding highlights a fundamental behavioural trade-off: altruistic spending often suffers as individuals tighten their financial priorities in the face of taxation.

Nonetheless, Ring is careful not to portray wealth taxes as inherently harmful or misguided. While they may crowd out charitable contributions to some degree, he acknowledges that such policies can still play a vital role in ensuring social equity and funding essential services. He argues that The key question is whether taxes reduce giving and whether public expenditure supported by tax revenues delivers greater overall social welfare than private donations would have achieved. The debate is not about taxation versus charity but about striking the most effective balance between the two. For policymakers, this research serves as a valuable reminder: good intentions must be matched by careful design, especially when the goal is to enhance — not inadvertently diminish — the social good.

More information: Marius Ring et al, Wealth Taxation and Charitable Giving, The Review of Economics and Statistics. DOI: 10.1162/rest_a_01562

Journal information: The Review of Economics and Statistics Provided by University of Texas at Austin