Who Benefits From Government Tax-Subsidies for Corporate Charitable Food Donations?

Abstract

Leveraging government tax incentives to prompt corporate charitable giving has gained considerable popularity over the past decade. This paper sheds light on the broader consequences of the U.S. government’s tax-subsidy policy for charitable food donations, which is determined based on the fair market value (FMV) of the donated products. We incorporate the tax-subsidy into a monopolist food retailer’s after-tax profit function. Market demand is both price- and quality-dependent, and the shelf-life of the goods is determined by their initial quality and deterioration rate. The retailer makes joint quantity and pricing decisions over two periods, procuring goods at the start of the selling season and (possibly) donating at the end of period 1. We characterize the retailer’s optimal policy and specify conditions under which she donates some, all, or none of her leftover inventory. We explore the impact of government tax-subsidies on the retailer’s actions, consumer surplus, quantity of donations, and total welfare. We show that tax-subsidies may motivate retailers to intentionally create supply scarcity (by donating more) to increase FMV (determined by the second-period price), thereby enhancing tax deductions. While tax-subsidies encourage donations, they can also unintentionally harm consumers by reducing supply and raising prices. Interestingly, we show that a higher subsidy does not necessarily lead to more donations; the retailer may choose to donate fewer units to achieve the same tax deduction while increasing sales revenue. We investigate conditions under which tax-subsidies can simultaneously increase donations, consumer surplus, and retail profit. We show that this outcome is possible only when retailers donate low-quality goods in modest quantities. Our findings reveal how FMV-dependent tax-subsidies can backfire, reducing both consumer surplus and total welfare while benefiting the retailer. Governments must carefully weigh the benefits of donations against potential harm caused to consumers.