Chapter 36 Tax Incentives in Cultural Policy

Abstract Cultural policy discussions are increasingly concerned with the creation and restructuring of tax incentives; thus, cultural policy and tax policy are becoming more and more intertwined. With the widely held perception that there has been a general decrease in the availability of direct public resources for culture, a search has begun for other sources of support and for ways to provide incentives for those other sources. Moreover, with the growth in the use of forms of decentralization, desetatisation, and devolution in cultural policy, increased attention has been paid to tax policy as a way of spreading decision making over public resources more broadly. Thus, there has been a rise in the use of tax policy to provide incentives for what is considered to be desirable behavior vis-a-vis the arts and culture, particularly though not exclusively with respect to its nonprofit component. It has been clearly documented that the indirect aid embedded in various taxes forgone by the various levels of American government are a much more important source of financial support than are the government programs of direct support and that foremost among these is the deductibility of charitable contributions. As a result, many countries have begun to pay more attention to the “American model” of cultural support with its high level of reliance on private donors and its attendant tax incentive structure. Adopting a “tax expenditure” perspective, this chapter begins with a summary of the existing literatures on tax policy in cultural policy. It then proceeds to a consideration of the accumulated evidence with respect to the effects of tax exemption: the price elasticity of giving; the income elasticity of giving; the differences between individual and collective decision making with respect to distributing public resources to the arts and culture; the kinship between tax incentives and matching grants; the economics of tax incentives for corporate contributions; the incidence of tax incentives in comparison to the incidence of direct support; and the extent to which tax incentives promote crowding out or crowding in behavior with respect to other revenue sources. While most research has been focused on American tax incentives for charitable giving, some studies do exist for other countries, and their results are summarized where available. For the moment, the econometric results depend substantially on the model specification and the type of dataset used. For those who would argue in favor of tax-based incentives, at least with respect to charitable donations, there is considerable evidence in support of the view that such incentives would have the desired economic effects. But those who are dubious about the net effects can also find evidence to support their arguments. Despite the ambiguity of the econometric evidence in the United States, the use of tax-based incentives is proliferating. A set of contemporary international examples suggests (i) that indirect aid is the terrain in which many of the most interesting innovations and variations in the funding of the arts and culture are taking place, and (ii) that this proliferation is more likely due to the influence of politics and advocacy than to the influence of reasoned analysis.