The Chancellor Is An Idiot, Right?

When Britain’s Chancellor of the Exchequer George Osborne made his budget speech a couple of weeks ago, the well-trailed headline was his decision to cut the rate of income tax for the highest earners to 45% from 50%. Cue howls of complaint from the Labour opposition and ridicule for the government’s claim that ‘We are all in it together’. Yet it was another budget announcement that on April 1st got the leader writer of the Financial Times spluttering – the decision to cap the tax relief on giving to £50,000 or 25% of income, whichever is higher. “Almost half of charitable contributions today come from less than one-tenth of donors”, the FT explains, warning that slashing tax relief might deter these big donors.

You can see why the charity sector is up in arms about this and has launched a #giveitbackgeorge Twitter campaign. It is not just that Mr Osborne has offended a sectoral interest. He also stands accused of muddle-headedness, since one of the big announcements in his previous budget was a new tax break for donors giving away more than 10% of their legacy in their will. Worse, a man who was once revered as a political tactician is now looking like a bit of a chump, given that his Prime Minister’s big idea, the Big Society, is all about promoting more giving. Certainly this promises to make the government’s much heralded Giving Summit next month less a celebration than a wake.

Yet perhaps a few words for the defence are appropriate. First, Mr Osborne does have grounds to worry about gift-giving as a tax-avoidance strategy. As Civil Society Finance has reported, the Treasury has been spooked by a 2009 legal ruling that donations to any European charity can now enjoy a tax deduction. Laxer regulation of charities in other countries could, it seems, allow less scrupulous wealthy citizens to cheat the taxman through “pseudo-philanthropy”. The charity sector responds that Mr Osborne is using a sledgehammer to crack a nut and that such avoidance could be tackled on a case by case basis.

A different case for the defence, and one that has not been made by the government, is that the whole system of tax subsidies for giving is a mess. The Charities Aid Foundation (CAF), one of the leaders of #giveitbackgeorge, has come up with a poll of 200 major donors which found that more than half of them would cut their giving by at least 40% as a result of the tax change. Well they would say that, wouldn’t they? That is not to say that the tax change would not have any effect, it’s just that there’s precious little evidence that the steadily improving tax subsidy for giving has had that much impact on philanthropy overall. Indeed, an excellent blog post by CAF’s Rhodri Davies rehearses some of the arguments about why giving should not be subsidised at all.

We think that there is a good case to subsidise philanthropy, since private capital can contribute to social good in ways that it is impossible for government to do. Hacking away a major tax incentive for giving without any serious analysis of its likely impact is reckless, at least, and should be reversed at once.

Yet the government should also seize the opportunity in this self-inflicted crisis, by making the reversal of this decision part of a deal with the charity sector that there will be a ‘zero-based’ reform of tax subsidy for giving. To reassure charities, the government should guarantee at the outset that the size of the subsidy will not change. The review’s remit should be to explore how the subsidy can best incentivise giving. For example, if smaller givers are more likely to be motivated by a tax subsidy, then maybe the priority should be to simplify Gift Aid to increase uptake of this tax break by the public at large, even if it means smaller tax breaks for wealthy donors. Or, if mass donation is found to be fairly unresponsive to tax subsidy, maybe focus the subsidy instead at the top end where it could have more effect on the total amount of cash reaching the charity sector. The review could also iron out the current lopsidedness of the tax subsidy towards giving rather than other ways of doing good, such as social investment. (And it goes without saying that, as in America, there should be a minimum payout rate for grant-making foundations to stop the warehousing of cash at taxpayers’ expense.)

The philanthropy sector’s answer to any question about the tax incentives for giving always seems to be “more”. As a result, in Britain – and indeed the rest of the world, including America, where the Obama administration has also proposed cutting the charitable tax deduction – we have a mosaic of unproven subsidies for philanthropy. By starting from scratch to design a system that is focused on encouraging more and better philanthropy Britain would also be advancing its ambition to become the world leader in social innovation.