Home > Uncategorized > “The rich are different…“

“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.

Advertisements
  1. April 20, 2012 at 3:26 pm

    I agree that the elasticity of donations in response to a tax break is a critical variable, but one more consideration needs to be added. First, let’s posit that the purpose of the tax deduction is to serve the public purpose of charitable giving. The government can either pay for aid to the poor and needy directly through a line-item expenditure or it can pay indirectly through a tax expenditure. If $1 of tax expenditure (i.e., lost revenue to the Treasury) generates more than $1 of new tax qualified giving, it would seem the tax expenditure is more efficient. However, we also have to consider how much of the added giving actually hits the target, that is, how much goes to true charity. US experience is that only about a third of tax-qualified donations actually go to charitable purposes. The math is clear: If the elasticity is, say, 1.5 and the percentage of added giving that serves the intended public policy purpose is only 1/3, then it would be twice as efficient for the government to support the charity directly. I don’t know what these numbers are for the UK, but for the US, they don’t look good. See this recent post on my blog for a longer discussion of this point: http://tiny.cc/m4r1cw

  2. Jamie
    April 18, 2012 at 1:38 pm

    Great post. The allocation of funding argument is critical.

    Charities may well be better at delivering certain services than the public sector. Which is why public funding via contracts to deliver public services are a large source of funding for many charities: ‘two thirds of bigger charities, i.e. those with an income of £10 million a year, derive 80% of their income from delivering public services.’ (http://fullfact.org/factchecks/charity_voluntary_big_society_government_funding-2498)

    The cap in itself is not contradictory to the Big Society.

    While as you say wealthy donors give to a range of different charities, I think it is wrong to dismiss this NHS v Opera point. The arts do tend to benefit from a small number of wealthy donors who donate large sums to a relatively small number of organisations (largely based in London). To quote Arts & Business ‘the reasonably high number of average mean donations received, suggests that some of these donations are particularly noteworthy’ see background data here – http://www.ncvo-vol.org.uk/sites/default/files/UploadedFiles/NCVO/Publications/Publications_Catalogue/Sector_Research/FINAL_UK_Giving_2009_FINAL.pdf.

    So arguably it is arts organisations that have the most to gain from tax incentives and potentially lose from the cap.

    Are you aware of any research that examines the estimated rebate elasticity according to types of charity that would receive the donation?

  1. May 1, 2012 at 8:15 am

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: