All charitable donations in Richland are tax-deductible. However, it was found that the volume of charitable contributions declined significantly when the income tax rate in Richland was lowered
What is the reason behind such an outcome? Explain with an example.
People often donate less when it is costlier to give. The opportunity cost of charitable giving increases when the income tax rate falls because the donator can enjoy a larger amount of money if he does not donate. For example, a person contributing $100 to charity and facing an income tax rate of 20% will have only $80 if he does not contribute. However, if the income tax rate falls to 15%, he will have $85 if he does not contribute. This is exactly what happened in Richland.
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