“The rich are different…“

Sarah Smith

The furore over the cap on tax relief on charitable giving refuses to go away. As one back bencher put it the other day – it is hard to see why you would want to pick such a fight for such small estimated financial savings.

And if you do, it would be good to be armed with some good arguments and some hard evidence – the current Government appears to have neither.

The bad arguments are that wealthy philanthropists are dodging tax to give to dodgy charities. The overwhelming majority of philanthropists most likely are not – and anyway, a tax cap is the wrong tool to address the problem.

A better argument would focus on the effect of tax incentives on donations. If you cut tax incentives, donors are likely to reduce their giving (i.e. the charity sector will lose) but they aren’t likely to stop giving altogether. The critical issue for the Government is whether the loss in donations is more or less than the gain in tax revenue. It is the combination of the two – total donations and total tax revenues – that will determine the overall level of “public services” (in the broad sense) that can be provided.

What matters is the responsiveness of charitable donations to changes in the “price of giving”. The critical level of the price elasticity is one (in absolute value). If the price elasticity is less than one in absolute value then the fall in money from donations will be less than the increase in Exchequer revenue – the charity sector will lose but this will more than offset by an increase in tax revenue out of which to fund public services (or to compensate charities). If the price elasticity is greater than one in absolute value, however, then the fall in donations will be greater than the increase in tax revenue.

What does the evidence say? The Government has said very little on the likely behavioural response. But just over two years ago, we did some research for HMRC and HM Treasury on donor responsiveness to changes in Gift Aid tax relief. This looked at both the rebate relief (how much higher-rate donors can claim back – which is the bit that is going to be capped) and also the basic-rate relief that charities can claim on all taxpayer donations. This second element is a bit like a match – I give £1 to charity out of my net-of-tax income and then the Government matches it with 25 pence worth of basic rate relief. Our main finding for higher-rate taxpayers as a whole was that contributions were significantly more responsive to changes in the match element (elasticity greater than one) than they were to changes in the rebate (elasticity less than one) – this result is shown in the first row of the table below.

In principle, this would provide a plausible rationale for cutting back on rebates. An elasticity less than one in absolute value means that rebates are not a cost-effective way of increasing money going to the sector – it would be more cost-effective for the Government to increase the match element, or to allocate the funding to charities itself through grants.

Yet, as F Scott Fitzgerald once said, “the rich are different to you and me” and in this case, the more people give, the more responsive they are to changes in tax relief – not surprisingly since the stakes are higher. This is clear from the other results in the table below. In the report, we estimated the elasticity separately for donors who had given £10,000 a year or more – and found that they were more responsive than other higher-rate donors, although the rebate elasticity was still below its critical level.

But, we can do further analysis on the data to get closer to the group that is actually going to be affected by the cap. The table reports new results for donors who reported that they gave £25,000 and £50,000. The sample sizes are small for this final group, but the estimated rebate elasticity is -1.19. This is greater than the critical level, implying that the loss in donations following a cut in the rebate would be greater than any increase in tax revenue.

Of course, there are caveats to this finding  – donors were responding to hypothetical changes, there are only a few really big donors in the sample, a cap on relief is not the same as a change in the value of the rebate. Yet, it is pretty much the only available evidence on how these donors would respond and it suggests a sizeable response among the group that is going to be hit by the cap – bigger than any increase in tax revenues.

Estimated elasticities – changes to the rebate and match elements of Gift Aid.

Donations	Rebate elasticity	Match elasticity	p-value	N
All higher rate donors	-0.33	-1.16	0.000	850
Donations >=£10,000	-0.64	-1.19	0.000	83
Donations >= £25,000	-0.72	-1.28	0.018	30
Donations >=£50,000	-1.19	-1.93	0.045	12

p-value is for test of equality of rebate and match elasticiites. Source: Analysis of online survey responses – Justgiving donors and CAF account holders.

The impact on the level of funding, therefore, is potentially negative. There may be a different argument to be made about the allocation of funding – the services funded through private donations will be different to publicly-funded services. In some quarters, this has been characterized as a choice between the NHS and the Royal Opera House, although this is a gross simplification – wealthy donors give to a range of different charities; and charities may be better at delivering public services in many cases. Indeed, one reason why the cap on tax relief is hard for many to swallow is that up until now, this Government has been clearly signaling that it favours private funding  and private delivery (“Big Society, not Big Government”). Behind the debate over the tax cap lie some fairly fundamental issues about how – and by whom – public services should be funded and provided.

Charitable Giving and the budget: A sledgehammer to crack an egg?

Michael Sanders

The Chancellor announced on Tuesday^[1] that he was “shocked”, by the extent of tax avoidance occurring, completely legally, through wealthy individuals giving large portions of their income to charity, or claimed through other tax reliefs.

This comes as part of an ongoing row between third sector organisations and the government over the plans announced in the Budget to cap the amount on which tax reliefs can be claimed at £50,000, or 25% of an individual’s income, whichever is greater. The effect of this, estimated by the government as a saving of £890million in 2014-15 if individuals do not change their behaviour, remains, as Sarah Smith said in this blog^[2] previously “almost impossible to answer” by a third party, as HMRC do not make available the data used in their analysis – which is itself not broken down by sources of reliefs.

This morning’s declaration by Number 10 that “wealthy people are donating to charities which do not do a great deal of charitable work”^[3], is another salvo in this argument.

It does, however, highlight a more serious issue with the way in which charities are regulated in this country. The organisations to which these donations are going must be bona fide charities, registered with the charities commission, in order for these reliefs to be claimed. The Charities Aid Foundation, among the vociferous opponents of the change to the tax relief system, would presumably not oppose the prevention of tax avoidance through these charities.

If, as the government is presumably arguing, these charities exist purely for the purpose of tax avoidance, why are they afforded charitable status at all? Why does the government feel that it is acceptable for people to avoid tax to the tune of 25% of their income through these faux-charities, but no more? Although some have long argued that there are too many charities in the UK^[4] (over 180,000)^[5], it is understandably hard to make a clear judgement as to which should be disposed of. Nonetheless, the government’s statement this morning implies that they are able to identify a number of them. Given that these charities are the recipients of huge donations, cutting back on avoidance through them by stripping them of their charitable status and making more rigorous the accreditation and auditing process for charities would appear to be more efficient than the imposition of a cap, and would avoid the collateral damage to legitimate philanthropists and the charities they support.

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^[1] http://www.bbc.co.uk/news/uk-politics-17661011

^[2] http://cmpo.wordpress.com/2012/04/02/a-taxing-time-for-donors/

^[3] http://www.bbc.co.uk/news/uk-politics-17664893

^[4] http://www.guardian.co.uk/society/2000/nov/08/guardiansocietysupplement5

^[5] http://www.charity-commission.gov.uk/

A taxing time for donors

Sarah Smith

First the granny tax and now the cap on higher-rate reliefs. The £50,000 cap on higher-rate reliefs – announced as a measure to reduce tax avoidance – is proving contentious because it applies to charitable giving (as well as loan relief and loss relief).

Aside from the merits or otherwise of pre-announcing caps (if you are serious about limiting tax avoidance then why give people plenty of time to re-organise their affairs?) another credibility issue is whether charitable donations really constitute a major vehicle for tax avoidance – unless this is closing a potential loophole to limit the damage from closing other loopholes.

The issue that is causing real concern however is how much damage the cap will do to major donations – exactly at a time when other Government departments are looking to philanthropists to make up the shortfall from funding cuts in areas such as arts and education.

This crucial question is almost impossible to answer – at least outside HM Revenue and Customs – because it requires knowing not only how much people donate, but also how much their income is and how much they use the other reliefs. HMRC have estimated a projected total saving of £870 m in 2014 – 15. Since this is nearly twice the current level of all higher-rate reliefs for charitable donations (Gift Aid, payroll giving and gifts of shares and land), the presumption must be that the adjustment will in large part be to the other capped activities. However, it would be helpful to have more detailed estimates that broke down the revenue savings across the different types of relief – and only HMRC is well-placed to make this kind of calculation.

HMRC also provided a lower projected saving (£490 m in 2014 – 15) that takes into account behavioural responses – i.e. the fact that people can respond by smoothing their donations over time. This behavioural adjustment could potentially reduce the total loss of income to the sector. But, not everyone is able to respond in this way.

Analysis of data from the Charities Aid Foundation (CAF) – who provide charity accounts to a number of major donors – reveals a sizeable number of donors who regularly give away amounts that would make them likely to be hit by the cap in a single year. Over a six-year period from 2005/6 to 2010/11, 124 CAF account holders gave away more than £200,000 in any single year. Moreover each of them gave this amount an average of 2.5 times over the six years. However, this understates the consistency of their giving since not all of them were in all six periods. In fact only two – out of the 124 donors – did not give more than £200,000 in each and every period in which they were observed in the data.

Of course we don’t know what these donors’ incomes are and we don’t know what other reliefs they are claiming. But if they give large amounts regularly and can’t smooth their giving, the donations they make in excess of the cap  – totaling more than £43 million in 2010-11 (£50 million if the cap applied to donations of £100,000 or more) could be at risk.

Although many of these donors are part of the “million pound donor club” making large, single gifts, much of their giving is less visible consisting of smaller donations spread over a wide range of different charities – more than 1,000 different organisations in 2010-11, including the arts and education as well as medical charities, overseas charities and small, local organsations. The impact of the cap on the sector could be widespread.

Should Payroll Giving be abolished?

Michael Sanders

John Rentoul, chief political commentator at the Independent and biographer of Tony Blair, has achieved a cult following for his list, published online of “Questions to which the answer is no”, currently standing at number 730 at time of writing. Despite some postulating to the contrary in recent weeks, the title of this blog is a good contender for slot number 731.

A report^[1], by Adrian Sargeant and Jen Shang of the Bristol Business School at the University of the West of England, has strongly suggested, however, that the scheme may not be “fit for purpose”, and that it may warrant scrapping, to be replaced by widespread solicitation of donations via direct debit in the workplace.

It is true that payroll giving is not without its flaws; Potter and Scales (2008)[2] identify in their review of payroll giving a considerable number of areas for improvement, including the need to simplify the system of enrollment, better market the offering, and to speed up the process so that charities receive money given more quickly.

While nobody disputes that payroll giving could be improved, it is foolish to argue that it is without important merits, such as employer matches and tax effectiveness. Moreover, although payroll giving is unpopular among fundraisers^[3], it is popular both with government (who ultimately will decide whether the system is to be scrapped) and with donors. If the retail idiom that “the customer is always right” holds for charity, this should by itself be enough to justify its continuation.

These advantages to payroll giving pale in comparison, however, to the strength of the assumptions made by the report’s authors.

The authors argue that while employer matches and some level of tax efficiency will be lost by moving from Payroll to Direct Debit giving, this will be compensated for by removing the need to contract with a Payroll Giving Agency, and, seemingly, through increased revenue per head (people tend to give more through direct debit than through payroll).

For this to be true, current direct debit givers would need to be identical to current payroll givers in every dimension except their means of giving. The evidence does not seem to bear this out, with a recent report by the Charities Aid Foundation^[4], finding that payroll givers are on average young and more likely to be male than the general population of givers. Since these groups tend to give less to charity generally, it seems that selection, not the mechanism of giving, is driving the smaller donations.

If we don’t believe that donations will suddenly rise on conversion to a direct debit system, can we at least assume that donations per head will remain the same? Probably not. Donations through Payroll Giving are cheaper than through direct debit because of their tax effectiveness; for each unit of “good” done by the charity, the donor must forego less other their own consumption. This move would amount to a rise in the price of giving for an important element of society, and under reasonable assumptions could lead to a fall in donation amounts.

Nor is it clear that the number of donors would remain constant. Potter and Scales (2008) identify “widespread opinion that employer-matching schemes were very valuable in encouraging employees to sign up, and provided a real incentive” (p 53), suggesting that at least some donors are induced to donate by the match – if the match varies with their donation (as is common), this amounts to a further reduction of the “price” per unit of good done by the donor, and removing it would further discourage donation.

Some money would undoubtedly by recouped from the portability of direct debits, which is estimated (Jenkins (2007)^[5]), cost charities around £7million a year; whether the full amount of this would be recouped is uncertain, as some employees leaving a firm for unemployment or retirement may wish to curb their spending and hence cancel their direct debits, despite incurring a guilt cost.

How sensitive might giving be to some of these factors? Without rigorous analysis, it is impossible to say with much confidence, but for illustration, we can look at two model cases of payroll giving compared with the average. Mean donation size through payroll giving is around £10, with only 6% of those eligible taking part. Royal Mail and British Telecom, both of whom offer an employer match, raise £2.5million apiece, Royal Mail^[6] through high levels of enrollment (25%), and BT through large donations (around £20 a month^[7]), and both attribute their success in large part to the match. Both firms give around 4 times the average for a firm of their size, and between them contribute 5% of all payroll giving donations – were enrollment to fall to average levels, this would make a marked difference.

Comparing the two worlds as best we can, we see that £4.4million (Guardian, 2011), of revenue could be saved through reduced administrative cost, and £7million through portability in the best case scenario, for a saving of £11.4million. Leaving aside possible changes to amounts donated and to individuals’ likelihood of donating, Potter and Scales (2008) estimate that employer matches amount to 10% of payroll giving. Since payroll giving is valued at £114million in 2011^[8], the cost of scrapping it to charities would be £11.4million – exactly what it would save under the best case.  In short, the case for scrapping payroll giving just doesn’t add up.

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^[1] http://www.institute-of-fundraising.org.uk/Resources/Institute%20of%20Fundraising/Documents/PDF/Growing_Philanthropy_UK_Summit_Report.pdf

[2] Potter and Scales (2008): “Review of Payroll Giving” Institute of Fundraising

^[3] http://www.guardian.co.uk/voluntary-sector-network/2011/jun/29/payroll-giving-downsides-for-fundraisers

^[4] CAF (2011) “Payroll Giving in the UK”

^[5]  Jenkins (2007): “Report to support the proposal for portability of Payroll Giving” Institute of Fundraising

^[6] http://www.payrollgiving.co.uk/downloads/royalmail07.pdf

^[7] http://www.payrollgiving.co.uk/downloads/BT%20Case%20Study%20Apr%2011.pdf

^[8] http://www.payrollgivingcentre.com/facts%20figures.htm

Breaking News: Price rises reduce demand

Michael Sanders

Third Sector Online[1] is reporting the results of a survey by website easyfundraising.co.uk, finding that of 400 people surveyed, some 53% would not give more money to charity if the government were to cut income tax.

Although such a cut is not currently on the cards (although proposals to significantly increase personal allowances over the course of this parliament, if implemented, would reduce the marginal rate of taxation for some and the average rate for most), this finding is interesting (I will ignore for now questions of selection bias raised in TSO’s comment section).

Gary Thompson, the managing director of easyfundraising.co.uk, identifies income tax as an “annoyance”, but is reportedly surprised at the finding that only 47% of the population would choose to spend their windfall on charitable donations, suggesting that: “As a result of the increasing cost of living in Britain, many are facing a difficult time financially, and the coalition government’s public sector cuts and changes to family benefits are clearly having a growing impact on our finances and ability to support charitable causes.”

A lack of financial stability and rising prices are pertinent factors, but even were they not, this result should not be as surprising as it made out.

If income tax were cut, there would be two primary effects. First would be a rise in income; if, let us say, the basic rate of tax were decreased from 20% to 18%, workers would have more money in their pay packet each month. The expected effect of this rise in income would be that individuals may consume more of a variety of goods[2], including, potentially, charitable donations; it is the absence of this effect which is causing surprise here.

However, there is a second effect to consider here. All giving by taxpayers in the UK is eligible for Gift-Aid, whereby charities can reclaim income tax at the basic rate. Hence, the price of giving changes with the income tax rate. At the moment, if a worker wishes the charity to receive £1, she must sacrifice 80 pence of other goods; if income tax fell to 18pence, her donation would have to rise to 82p for the charity to receive the same amount. She will be paying more for the same amount of “good” done. If, as seems likely, tax incentives like Gift Aid make giving more attractive, this rise in the price of giving will make it less, and will lead to a fall in donations.

The results of the survey suggest that for 53% of the population, the price elasticity of demand for donations is larger than the income elasticity of demand; not a damning critique of society or the times we live in.

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[1] http://www.thirdsector.co.uk/news/Article/1080657/half-people-not-give-charity-paid-less-income-tax-survey-finds/

[2] If this money is financed from borrowing (as seems likely in the current state of nature), and Ricardian equivalence, a controversial but not disproven theory, holds, then any rise in income will be perfectly offset by a rise in savings as workers seek to cover themselves against future tax rises to repay the debt.

Small steps towards the Big Society?

Mike Sanders and Sarah Smith

 

Last week’s Green Paper set out the government’s strategy for encouraging people to give time and money – part of its vision of a Big Society. There were few concrete ideas – beyond the suggestion that ATMs provide prompts to donate – but instead a set of guiding principles: Great opportunities, Information, Visibility, Exchange and reciprocity and Support (GIVES). In a nutshell – people need new and exciting ways to give (such as at ATMs) and they need to know about them; their giving needs to be visible and it needs to be valued. This is a potentially exciting time for the sector – even as many are worried about the effects of government spending cutbacks – it provides fertile ground for experimentation to see what works and what does not. In designing potential pilots, there is a growing body of evidence to build on.

A number of field experiments with individual charities have found successful triggers that can encourage people to give – these include announcing lead donations, providing a match, rewarding donors with small gifts, making donations public and telling people how much others have given. The findings have led people to generalize about what motivates people to give – signals of quality for individual charities, the desire for prestige, reciprocity etc – yet single-charity studies can only tell us about what motivates people to give to specific charities. None of these studies has looked at whether the triggers simply cause people to give more to charity A at the expense of charity B. There is a real risk that all the shiny new opportunities simply cause people to change the way that they give and a need to show that new schemes increase total giving, not just shuffle it around. To achieve that, there needs to be more understanding of what the real barriers are to people giving – and what can be done to eliminate them.

One of the big ideas in behavioural economics is that defaults can have a powerful effect on people’s behavior in overcoming inertia; they have been shown to work in relation to employer pensions with auto-enrolment leading to big increases in participation. Payroll giving is an obvious extension that we hope to test. But one important lesson from past research is that the detail of the default matters – a low default, while increasing participation, could lead to some people reducing the amount that they give. There also needs to be evidence that a scheme that helps someone to help others can work as well as a scheme that helps someone to help their future selves.

The emphasis on visibility accords with the findings from research which finds positive peer effects. For example, Frey and Meier (2004)[1] found that when students were told that a higher proportion of past students had donated to a good cause, 64 per cent compared to 46 per cent, this had a positive effect on the proportion who gave – but the increase was small at around 2 percentage points. But, as with defaults, providing so-called “social information” can have a negative effect if the amounts that others have given are low. Alpizar et al (2008)[2] found that informing people about a low modal donation increased participation but reduced the average donation (compared to no social information). More interestingly for the ATM proposal, suggestions to give particular amounts that are imposed from above have been found to have a negative effect. Alpizar & Martinsson (2010)[3], show that compared with a social reference that comes from peers, a suggestion from the charity reduced both the probability of giving and the conditional amount given.

Evidence from ultimatum games in the lab, and from elsewhere, suggests that individuals have a preference for fairness[4], and that this preference is a driving force behind their charitable donations. Based on this, and the increasing prevalence of ideas such as a “Robin Hood tax” and “UK Uncut”, suggesting a belief that corporations, and in particular banks, are bearing too little of the burden of economic hardship, would seem to suggest that the encouraging charitable giving through boxes emblazoned with the logos of banks may not have the desired effect. One response to the ATM suggestion on BBC’s Have Your Say website was that “If bank cards started nagging me to donate I think I’d give LESS not more”[5].

 

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[1] Frey, B. & Meier, S. (2004) “Social Comparisons and Pro-social Behavior:  Testing “Conditional Cooperation” in a Field Experiment” American Economic Review Vol 94 No 5 pp 1717-1722

[2] Alpizar, F., Carlsson, F. & Johansson-Stenman, O. (2008) “Anonymity, reciprocity, and conformity: Evidence from voluntary contributions to a national park in Costa Rica” Journal of Public Economics Vol 92 issues 5-6 pp1047-1060

[3] Alpizar & Martinsson (2010) “Don’t tell me what to do, tell me who to

follow! – Field experiment evidence on voluntary donations” Working Papers in Economics No. 452

[4] Barr & Zeitlin (2010) “Dictator Games in the lab and in nature: External validity tested and investigated in Ugandan Primary Schools” CSAE WPS/2010-11

[5] BBC (2010): “Ministers urge giving to charity at the cash machine” BBC News Website http://www.bbc.co.uk/news/uk-politics-12085506

The season of goodwill

Sarah Smith

Charities might rightly feel that they have had a tough year. First the recession which many charities claim hit their donations. Then, the announcement of public spending cuts which will affect thousands of charities which rely on government funding.

The festive season should therefore bring a brief respite and provide a temporary boost to charity incomes as this is the time of year when people really do dig a little deeper and give more to charity than during the rest of the year. The chart below shows average weekly household donations to charity for each month in the year – there is a spike in march/april, coinciding with the end of the tax year, but a greater spike in December. Santa, it appears, has a greater effect on giving than the tax man. These averages are for households that actually give to charity; the proportion of households who give is also slightly higher in December than at other times of year, but it is the amounts that people give that show the biggest increase at Christmas. The average weekly amount given is nearly £12 in December – more than twice the average amount over the preceding three months.

Source: Living Costs and Food Survey, 2008

It is hard to say exactly what accounts for the festive increase – other than it being the season of goodwill to all men. Some of it may be religiously motivated; the evidence shows that religion is strongly associated with charitable giving and that people who are religious are more likely to give to charity and to give more. Yet as religiosity has declined in the UK over the past thirty years, Christmas giving has remained high and, if anything ,has increased over time. In 2008 (which is the latest year for which we have data) giving in December was 60 per cent higher than the average over the rest of the year; thirty years ago (over the decade 1978-88) it was roughly 16 per cent higher.

As part of the Big Society, the government is keen to encourage charitable giving. Research that we carried out on behalf of HM Treasury showed that tax incentives are not particularly effective at encouraging people to give more. The majority of people do not respond to changes in tax incentives by changing how much they give, although this does mean that Gift Aid style incentives that allow the charities to claim back the tax paid on donations can help to boost charities incomes (more than rebate-style incentives which rely on donors to adjust their giving). Understanding the December effect could give insights into what motivates people to give and be used to design more effective policies. As charities enter 2011 facing up to the reality of cutbacks in public spending both they and the government will be keen to ensure that higher giving is not just for Christmas.