Tax and Government Policy Implications for Corporate Foundation Giving

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Abstract
Even though there were over four million firms in 1988, only 1,300firms had foundations. However, these foundations contributed nearly $1.3 billion to charities. This article examines the effects of tax and other government policies on the establishment and use of corporate foundations in the United States from the early 1900s until the late 1980s. In addition, the study looks at the effect of the Tax Reform Act of 1986 on corporate and foundation giving. Two hypotheses are tested. First, corporate foundations may allow firms to smooth corporate gifts and maintain a steady level of corporate "goodwill." The notion of goodwill is similar to firm image or reputation. Second, corporate foundations may allow firms to minimize their tax bills, or maximize profits, over time. The findings of this paper support both hypotheses under the assumption that firms are profit maximizers. Tax and government policy makers can affect the timing and amount of corporate charitable donations by changing the corporate marginal tax rate, the social perceptions of corporate charitable activities (including foundations), the rulings on tax liability for foundations, and laws on deductibility of corporate and foundation gifts.

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