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Non-standard matches and charitable giving

Author: Michael Sanders

Non-standard matches and charitable giving

The use of incentives to encourage charitable donations is commonplace. The governments of most developed countries (including the UK), as well as many large employers, offer match rates, or rebates to encourage donations. The principle behind such match rates is simple. With Gift-Aid, the UK’s main form of tax effective giving, a donation of £1 from net-of-tax income by a taxpayer attracts basic rate tax relief, which goes straight to the charity – hence, the charity receives £1.25 for every £1 donated.

The effect of this is to reduce the price of donating a given amount – if I am a basic rate taxpayer, and think “I want the British Heart Foundation to receive £100”, making that happen will only cost me £80 from my net of tax spending.

There is much discussion, both in the academic economics literature and in the public sphere, about the effectiveness of such matches, particularly in the aftermath of last year’s proposed £50,000 cap on charitable tax relief – although most studies find that people’s donations are relatively unresponsive to changes in the match rate (they are price inelastic), CMPO research has shown that high value donors may be more responsive to changes in their match (or rebate) than are smaller donors.

This mixed evidence on the effectiveness of matches at increasing out-of-pocket donations suggests that alternatives to the standard match may be more effective. Options for non-standard matches are summarized in our new working paper, which draws on the behavioural economics and psychology literatures to several such possibilities, including, non-linear matches, where the more an individual donates, the higher the match rate; social and team matches, in which the match rate received by one donor depends on the donations of others, giving them an incentive to ‘crowd in’ their friends and colleagues; competitive matches , when only the most successful fundraisers receive a match); and lottery matches, where each donation increases the chance of a donor’s chosen charity receiving a large windfall match.

Although these suggestions are sound in principle, and supported by both theory and empirical evidence, none has been experimentally tested in a real world setting. We would encourage anybody interested in testing one or more of these novels matches to contact us.

 

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Marathon Fundraising

April 16, 2013 Leave a comment

Author: Sarah Smith

Marathon fundraising

The 2013 London marathon is in less than a week’s time. The hard slog of training behind them, most runners will be easing up, resting their legs before the real thing. Over the last few months, many will have sought training tips to improve their running, but what about the thousands of runners who are using the London marathon as a way of raining money for charity? What are some of the top tips for how they can achieve a fundraising personal best?

David Reinstein from Essex University has started an interesting discussion of research that fundraisers might find relevant. At CMPO, we have also begun looking at the rich data available from online fundraising website Justgiving.com to gain further insights into charitable fundraising.

The good news for marathon runners is that they have chosen a good event. Compared to fundraisers doing other events – cycling, parachuting, birthdays and other running events – London marathon fundraisers tend to have more donors (29 is the typical number) and raise more money overall (between £800 and £900 is typical).

Most marathon pages have a fundraising target. This seems to work. Compared to having no target, pages which specify a target amount get more donations and higher average donations. Donors clearly respond to the target – when the total amount raised gets close to the fundraiser’s goal, donors increase their donations to hit the target, but they give less once the target has been reached. With this in mind, raising the target could be one way to keep donations high.

Donors are also responsive to how much others have given. Arriving at a fundraising page, each donor can see how much other people have given and this information affects how much they give. A generous donation to a page – particularly made early on – can have a positive effect on later amounts given. Our results suggest that a one-off donation of £100 leads to around a £10 increase in the amounts given subsequently. Some of the effect comes through the fact that this kind of large donation triggers other people to match it; but there is also a wider, positive effect. Small donations, on the other hand, result in subsequent donors giving less. So, fundraisers have an additional incentive to encourage their friends, family and colleagues to be generous because of the knock-on effect that donations have on how much other people give.

Most people raising money by running in the London marathon will be relying on donations from their friends, family and colleagues. One question that Kimberley Scharf and I are looking at is how important the size of the person’s social group is – and whether you can be a successful fundraiser even if you have a relatively small social network. We capture the size of a fundraiser’s social network by the number of their Facebook friends. This may not be a perfect measure of the potential donor pool but many fundraisers do post to their Facebook pages. We find – perhaps surprisingly – that larger social networks do not translate into higher total amounts raised. Although fundraisers with more friends tend to get more donations, each donor in a large social network typically gives less, meaning that the total amount raised is roughly the same for those with a thousand-plus friends as it is for those with less than a hundred. This is true controlling for age and income and is also true for pages without a target.

There are a number of explanations for why this might be the case. One possibility is that, in a larger group of donors, each person’s donation matters less to the fundraiser and so the donors give less. It may also be the case that there are weaker relationships between the fundraiser and their friends in larger social networks. By digging further into the fundraising data, we hope to get a better understanding of the relationships between fundraisers and donors and provide further insights into what determines fundraising success.

Money for Good?

March 18, 2013 Leave a comment

Author: Sarah Smith

Money for Good? 

On Thursday, New Philanthropy Capital published a new report, Money for Good UK, about why people give and what might be done to encourage them to give more. The very next day, the 25th Comic Relief raised a record-breaking £75 million for charity and in doing so, served to illustrate a number of the key themes from the report. One of the messages from the report is that around half of donors feel no underlying obligation (moral or otherwise) to give money to charity. 47 per cent of those asked (mainly people who had given money to charity in the previous year) agreed that people should donate money to charity if they have the means. But nearly the same number (44 per cent) agreed that people should not feel obliged to donate money to charity. Comic Relief is a testament to the efforts of literally thousands of people to persuade other people to give to good causes.

So, what does persuade people to give? The report found that the personal touch is important – whether personalized communications from charities that donors have relationships with or an approach from friends, family and colleagues – and perhaps the odd famous celebrity.

People also say they care about impact. When asked about what factors they pay attention to when they give to charity, the most important is how the organization will use their donation (with 63 per cent of donors pay close or extremely close attention) and evidence that the organization is having an impact (with 58 per cent paying close or extremely close attention. This mirrors similar findings from a recent survey done on Justgiving donors. It is certainly something that Comic Relief understands – interspersing the comedy with clips showing where the money is going and how it is going to be spent.

It is a commonly held view that giving isn’t a rational decision. Providing evidence that donors care about impact and evidence of impact is therefore important. And it helps charities and fundraisers think about what kind of messages they need to deliver. But, it needs probing a little further. What does impact mean to donors and what kind of evidence do they want? On one level, it is clear that donors don’t want their money to be wasted, but do they really want to be presented with detailed accounts or impact studies? The report is careful not to push this too far – they emphasize that few donors do detailed research before giving to charity. Indeed, one possible explanation for the importance of personal recommendations is that friends and family are effectively vouching for the quality of the charity and acting as a substitute for the donor’s own research.

Following the report, NPC have emphasized that charities need to do more to demonstrate impact. But, another important next step is to find out more about what kind of information donors want – and how they respond to messages about charity impact and different types of evidence. There has been some limited work in this area showing that donors respond better to simple messages about personal cases rather than detailed statistics. These findings come from simple field experiments in which donors are randomly given different information to test the effect of alternative messages. More worryingly, the experiments show that donations actually appear to decline if donors are given, alongside the personal cases of individuals who are going to be helped, statistical data about similar victims caught up in a larger pattern of illness, hunger or neglect. The authors of the research concluded that donors respond to real rather than statistical lives. So while it is important for charities to generate data about their impact, it would also be worth finding out how best to deliver effective messages about charity impact in ways that – like Comic Relief – elicit positive responses from donors.

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A fall in giving

November 13, 2012 Leave a comment

Author:  Sarah Smith

A fall in giving

CAF and NCVO have today published the latest UK Giving report showing a decline in donations to charity. The estimated total amount donated to charity by adults in 2011/12 was £9.3 billion, a decrease of £1.7 billion in cash terms, and a decrease of £2.3 billion in real terms, compared to 2010/11.

Much of this decline is likely to be attributable to the ongoing economic climate. Looking at historical data, we know that donations were fairly resilient in previous recessions in the early 80s and early 90s. But this recent recession has lasted much longer and now appears to be hitting giving hard. In the past, donations have also tended to rise strongly when the economy grows, so let’s hope this bodes better for giving bouncing back in the future.

However, analysis that I recently did for CAF points to clear generational patterns in giving that may be more worrying for the prospects for donations. The research highlights a divide between pre- and post-war generations in terms of trends in giving. Among pre-war generations, there was a clear tendency for subsequent generations to be more likely to give at each age than their predecessors, and to be more generous. Among post-war generations, these trends – particularly in the proportion giving – have been going in the other direction. As a consequence of these generational changes, the giving population is ageing. Thirty years ago, around one-third of donations came from the over-60s. Today it is more than half.

A number of commentators have questioned these findings. In the discussion that followed the report’s publication, a number of points were raised about the analysis, all of which were legitimate, but none of which invalidated the research findings.

First – it was argued that we would expect some ageing of the donor population since the general population has been ageing. This is true, but the donor population is ageing faster than the general population. As noted in the original report, the share of giving done by the over-60s has been rising much faster than their share of total spending.

Second – the analysis focused on giving at the household level since many couples make joint decisions about giving. The rise in single-person households mean that the composition of households today is not the same as it was thirty years ago. But the same trends in giving are present if the analysis is done at the individual – not the household – level. The generational divide is not something that can be explained by the rise in single-person households.

Third – much of the media analysis focused on low levels of giving among young  households (in their 20s and 30s). This led many to point out – quite rightly – that people in their 20s and 30s today face many new financial pressures that their predecessors did not – from student debt to high house prices. But, the report is clear that the generational divide is one between the pre- and post-way generations, not something that is unique to today’s 20 and 30-somethings. People in their 50s today (the 1960s baby boomers) are less likely to give than today’s older households did when they were at the same age.

A number of factors may explain the generational divide – including changing religiosity, wider trends in civic participation (interestingly, other people have found similar trend when they have looked at voting, for example) and even the growth of the welfare state which for some people reduces the rationale for giving to charity. It is hard to say for sure why the post-war generations are less likely to give than their pre-war predecessors, but important to bear these long-term trends in mind when looking at the latest dip in giving.

“The rich are different…“

April 18, 2012 3 comments

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?

April 11, 2012 1 comment

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.

A taxing time for donors

April 2, 2012 1 comment

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?

November 1, 2011 2 comments

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.

Breaking News: Price rises reduce demand

July 25, 2011 2 comments

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.


[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.

Charitable Giving – How hard can it be?

Michael Sanders

Jeremy Clarkson, of Top Gear fame (among other things), made use of his column in this Sunday’s News Review[1] (in the Sunday Times, paywalled), to bemoan the death of philanthropy, and to propose a surprisingly economist-friendly explanation; the arrival of substitutes.

As Mr Clarkson says, “it’s because in the days of (William) Morris, and my great-granddad there wasn’t much you could actually buy”. Certainly it is true that since the 1930s the sheer number of status symbols required to maintain the kind of upper-middle-class lifestyle expected of a Times columnist has increased dramatically, and it is also true that charitable giving is, for many parts of society, on the decline[2]. That people, when given the choice between buying mosquito nets for others half way around the world or a new iPad for themselves, choose the iPad, seems intuitively simple. It is also on sound footing economically; if a preferred substitute comes along, from which you extract greater utility, substituting from one into another is only natural, and as the relative price of the substitute declines (as is typical for technology), we might expect the level of this substitution to increase.

Governments of all stripes appear to have agreed with this basic assessment, with the last Labour government reducing the ‘price’ of giving by making Gift Aid, a tax-efficient means of giving, available on donations of all sizes (previously it was available only on donations of £250 of more), and the current, coalition government, aiming to increase the ‘return’ on giving through rises in the Gift Aid Benefit Limit to “enable charities to give ‘thank you’ gifts”[3].

If all this seems sensible, what can we say about the conclusion to the article, that for Philanthropists, “their investment is going to make them a damn sight happier than the man who spent his cash…” on something more frivolous. Traditional economic theory suggests that this should not be the case. Following the Weak Axiom of Revealed Preference (WARP), if an individual chooses to buy a grande skimmed-milk extra shot mocha rather than mosquito nets, we can conclude that he prefers, given his income constraints, coffee to mosquito nets. Simplistically, this situation appears to be Pareto optimal – it is impossible to make one party (those at risk of mosquito-borne-disease) better off, without worsening the lot of another (our coffee drinker). Although it is possible to make a moral argument for redistribution from coffee to mosquito nets to improve social welfare, we might expect Clarkson’s pleading with us to give more to charity to fall upon deaf ears.

Some insight into why a narrow view of economics might seem to be wrong, and the Sunday Times’ most controversial columnist might be right, can be found in Behavioural Economics. A large quantity of research, summarized by Dellavigna (2009)[4] and Bernheim & Rangel (1995)[5], suggests that individuals may make decisions which are not only socially undesirable, but personally undesirable as well.

While changes in the relative price or value of giving may increase individuals giving, it is, of course, costly to do so, and will be less effective than governments might hope if, as the literature suggests, would-be donors are inattentive to the benefits of giving, or to the changes in policy.

In the coffee vs nets example, we can see another reason for the government to explore in depth the lessons of behavioural economics when planning the “Big Society” – these lessons are already being learned, and to great effect, by the firms with which charities are competing for funds. The placement of biscotti, mints and caramel waffles near the till in coffee shops, the offer made by baristas or their local equivalent (“would you like to go large on that?”), and defaulting to a mid-sized cups, are all Nudges; examples of behavioural economics put into practice.

It is clear that if the government is to achieve a ‘step change’ in the level of giving in the UK, and in so doing make both donors and recipients happier, charities will need the tools to compete with private firms and the willingness to use them – behavioural economics has the potential to offer those tools, and they are already being used to great effect by the competition.


[2] Smith et al (2011): “The State of Donation” Centre for giving and philanthropy.

[3] HM Treasury (2011) “Budget 2011” HM Treasury, HC836

[4] Dellavigna (2009): “Psychology and Economics: Evidence from the Field” Journal of Economic Literature Vol 47 No 2 pp315-372

[5] Bernheim & Rangel (1995): “Behavioural Public Economics: Welfare Policy Analysis with Non-Standard Decision Makers” NBER Working Paper 11518