Illustrate marginal tax rate alter his level of charitable

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Reference no: EM1348859

Income spent on charitable deductions is deductible from adjusted gross income in calculating federal taxable income. Consider a consumer's decision about how to allocate income between charitable giving and all other consumption. The price of all other consumption is $1, and the price of charitable giving is $1.

a. Using indifference curves and budget lines, show the effect of the deductibility of charitable contributions for a consumer who faces a 15% marginal tax rate (t=.15). Write an expression for the slope of the after-tax budget line.

b. Redo your graph for part a, showing a situation in which the consumer facing a 15% marginal tax rate does not change her choice of how much to donate to charity as a result of the deductibility provision.

c. Suppose the price elasticity of demand for charitable contributions is estimated to be -.5. Illustrate by how much (what percentage) does the consumer facing a 15% marginal tax rate alter his or her level of charitable giving as the result of the deductibility of charitable contributions?

Reference no: EM1348859

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