More Taxing Questions for Philanthropy

So, after needlessly offending Britain’s philanthropists by calling them tax dodgers, George Osborne, the Chancellor of the Exchequer, has sensibly abandoned his plans to limit the tax deductibility of their giving. This U-turn is embarrassing for the government, certainly, but not as harmful as it would have been to its efforts to promote a Big Society culture of giving had the tax changes gone ahead.

Congratulations are due, then, to the #giveitbackgeorge campaign, for a highly effective effort in shaping public opinion and political lobbying. If only Britain’s charities were as effective in lobbying for solutions to the social and environmental problems they are trying to address.

Nevertheless, as we have argued before, now that the subject of tax and charity has been raised, let’s have a serious conversation about how to ensure that a tax break that is, in effect, public spending, actually delivers good value to tax payers. As Matthew wrote in a recent article in The Economist, this is a question that should be addressed everywhere, not least in America, where a serious fight is looming over the favourable tax treatment of charities.

As you consider this question, here is some recommended reading. First, an essential article on “The Failure of Philanthropy” by Rob Reich in the Stanford Social Innovation Review. This shows empirically how little giving in America genuinely redistributes money from the rich to the poor.

Second, for a great review of the economics of taxing charity, there is “Charitable Giving and Tax Policy in the US” by Charles Clotfelter of Duke University. This contains a fascinating discussion of how America’s policy of tax deductions for charity “has the effect of handing over to wealthy individuals an extraordinary amount of influence over the allocation of public funds” and how it is associated with an “inherent tension between participatory citizenship and elitism.”

Thirdly, a wonderful history of the charitable income tax deduction in Britain, by Michael Gousmett. A highly readable PhD thesis, this includes an account of the similarly ill-fated attempt by one of Mr Osborne’s most famous predecessors in the Exchequer, William Gladstone, to make charities pay income tax. We also enjoyed Mr Gousmett’s account of a stealth move in the late 19th Century by Britain’s tax authorities unilaterally to narrow the definition of tax deductible charity to something closer to almsgiving, by refusing tax refunds claimed by some charities. When this was challenged in court, the 1891 Pemsel ruling by Lord Macnaghten reaffirmed the broad Elizabethan definition of charity. Had he decided the other way, the charity sector might look quite different today, with a greater focus on unambiguously good works that would make giving it favourable tax treatment far easier to defend.

Read on – and post a comment about what you think should be done to resolve the issue of how the tax authorities should treat giving.