Whose Tax Is It Anyway?

In the United States, the giving sector is up in arms about a proposal in President Obama’s budget bill to cut back the tax exemption for wealthy donors. In the United Kingdom, donors are complaining that the government’s desire to boost giving under its Big Society programme is not being backed up with new tax incentives. On both sides of the Atlantic the philanthropy sector is gearing up to defend tax breaks to giving. But then again, they would, wouldn’t they? Yet, a serious debate is long overdue about whether, or when, the public actually benefits from such tax breaks. And, since philanthropists and fundraisers care about the wellbeing of society, they should really be welcoming this debate, not merely protesting.

As we argue in the book, there are some good reasons for extending tax incentives to giving. First, giving is part of a healthy society and deserves to be encouraged. Second, philanthropists (at least, the best ones) can use that money in innovative and effective ways that government cannot. Tax incentives, however, also come with a cost. They are revenue foregone by the government, which means that, all things being equal, other taxpayers have to pay more. Given the parlous state of US public finances and the looming crisis in public services in deficit-cutting Britain, it is too glib for the philanthropy sector to argue that its tax subsidies should not be examined for value for money alongside every other line item of public spending.

By this point, no doubt, we have lost those who think that government’s only duty is to get smaller and that any mechanism that shelters the taxpayer from the grasping hands of the state is a good thing. Yes, we do think that paying taxes is part of the responsibility of every citizen, including (especially) the rich (and many philanthrocapitalists share this view). Indeed, paying a fair share is one of the elements of the ‘good billionaire guide’ that we set out in the book. Yet we absolutely reject the argument that punitive taxation to fund state spending on public services is the only acceptable model for a civilised society.

Rather than being unequivocally for or against subsidising giving, we need a debate about how well the tax system promotes more and, crucially, more effective giving.

It seems to us that the system of incentives needs to be made less haphazard. At the end of last year, Richard Thaler (one of our, and David Cameron’s, favourite economists) argued powerfully in the New York Times that the current system of US tax deductions for charitable donations is pretty warped. In the UK, addressing this would mean reforming the Gift Aid system, which is so user-unfriendly for both donors and charities as to be unfair. If giving is to be subsidised because it is a “social good”, all taxpayers should be encouraged to take advantage of it and all causes should benefit, not just those that can wade through miles of red tape.

Moreover, if (some) philanthropy is to be tax subsidised, surely it should be in order to generate some clear public benefit? In the US, as Robert Reich of Stanford University has pointed out, more than half of all giving goes to the pursuit of religion, which economists might call a ‘club good‘ rather than a public good. The UK, in our view, is on the way to getting this one right: to qualify for a tax break, a British charity has to prove that it delivers a public benefit.

Yet the UK is still too easy in its treatment of philanthropic foundations, some of which pay out so little in grants each year that they probably get more back from the taxpayer than they actually give away for the public good. The UK foundation sector hates it when we argue for the introduction of an annual ‘payout rule’, like there is in the US and Canada (5% and 4% of the value of the endowment each year must be given in grants, respectively). They claim that they are already regulated too much. Maybe. As Michael argued last night at an event organised by the European Association for Philanthropy and Giving, it is surely ridiculous that a large foundation could be paying out as little as 0.9% a year (an issue which Third Sector magazine curiously ignored in its write-up). Those who argue against a payout rule would be in a stronger position if fewer foundations were free-riding on the already over-burdened taxpayer.

Then we have to look at which tax tools are the most effective at leveraging impactful giving. The UK government has started to experiment with match-funding schemes to help universities, the arts and aid agencies to strengthen their donor base.  It may be that targeted schemes of this sort are a better way to subsidise and encourage giving than further tax incentives to giving of all kinds. Or maybe not. But that’s the point: we need a rational debate about the relationship between the public purse and philanthropy, not just constant pleading for more subsidy.