Archive

Posts Tagged ‘Charitable giving’

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.

Advertisements

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

Opting into “Opting Out” of charitable giving

March 23, 2011 Leave a comment

Michael Sanders

A recent poll by Workplace Giving, a payroll giving company, indicated that of 1000 respondents, 68% would favour the introduction of an automatic-enrolment system for payroll-giving. This kind of system would make the default for all workers in participating firms to be enrolled in a the scheme, giving to a given charity at a given level – they could then, if they so wished, opt-out of the scheme, or change the amount they give, and/or the charity to which they are giving (64% of respondents indicated a preference for having a hand in choosing the charity in the first place).

Why should this be the case? Only a minority of workers (only 6% of workers in participating firms, 2.4% of all workers)[1], actually give through payroll giving at the moment. While it is natural to suspect some selection bias in the answers to these questions, the magnitude of the difference suggests that at least some respondents who answered positively about the automatic enrolment system are not currently enrolled in payroll giving schemes in their firms.

If they are so keen to give to charity that they would favour and opt-out arrangement, why do they simply not enrol themselves in existing schemes, or set up a direct debit of their own accord? Work from across the field of Behavioural Economics appears to suggest some answers.

The first, and most obvious suggestion, is that individuals have a self-control problem, and continue to put off the act of enrolling. In these cases, a self-aware individual may prefer a “commitment device” such as an automatic-enrolment system, which compels (or in this case forces) them to partake. Evidence from the pensions literature in the united states suggests that automatic enrolment can have powerful effects on individuals’ behaviour in overcoming their self-control problems[2].

Respondents to the survey may also be demonstrating systematic overconfidence. Although the existence of this phenomenon is observed in previous research, for example finding that 93% of all drivers believe they are above the median ability[3], it is particularly interesting when combined with self-control problems. Despite previous evidence to the contrary, for example not yet having signed up to Payroll Giving, individuals strongly believe that they are more likely to overcome their self-control issues in the future. Given their expectation that they will sign up to payroll giving…tomorrow, and that their colleagues will not, automatic enrolment will make no difference to them in the long run, but will have a larger impact on others’ giving.

Finally, the institution of an opt-out is likely to induce more homogeneity of charity choice (among those passively remaining in the scheme), compared with softer policies such as “active enrolment”, whereby individuals are compelled to make a decision for themselves (often through a mandatory form)[4]. If the respondents were motivated by a particular cause (heart disease, for example), and believe themselves a more active participant in decision making, a prescriptive policy may be better for them, albeit at the cost of social welfare.

These phenomena, and others like them, may pose significant obstacles to the Government’s plan to induce a ‘step change’ in giving in the UK – something which, as this blog has previously discussed, will be very hard to do. They also point to a more nuanced problem with giving; instituting auto-enrolment may increase the level of giving, but if workers are heterogeneous in their charity preferences, it may decrease social welfare, or be a second best policy compared to a softer intervention. Although the results of this poll are positive for those who support payroll giving schemes, it is clear that more research must take place before we are able to accurately predict its effects.

 


[1] Potter & Scales (2008) “Review of Payroll Giving”  Strategy Complete Ltd. Commissioned by Institute of Fundraising

[2] Choi,  Laibson, Madrian, Metrick (2006)  “Saving for Retirement on the Path of Least Resistance”. Behavioral Public FinanceToward a New Agenda. Ed McCaffrey and Joel Slemrod, eds. New York: Russell Sage Foundation pp304-51.

[3] Svenson (1981): “Are we all less risky and more skilful than our fellow drivers?” Acta Psychologica 47: 143-148.

[4] Carroll,  Choi, Laibson, Madrian, & Andrew Metrick (Forthcoming) “Optimal Defaults and Active Decisions.” Quarterly Journal of Economics

The Big Society, charitable giving … and cheese

February 15, 2011 1 comment

Sarah Smith

 

At the end of last year, the Irish government received rather unfavourable coverage for its suggestion that it help the work of many charitable organisations by distributing the European cheese mountain to the poor.  In fact, research that we publish today finds a new link between charitable giving and cheese. On average, UK households spend as much on cheese as they do giving to charity – around 0.4 per cent of their total spending.

Of course the aim of our research is a little broader than the charity-cheese comparison. We analyse more than thirty years of data on household charitable giving and look at the main trends over that period.

We find that a lower proportion of households today give to charity in a two-week period than was the case three decades ago (27 per cent compared to 32 per cent). However, the Millennium year marked a turning point in the long-term downward trend (in 1999, the proportion was down to 25 per cent). This was a year in which the government reformed Gift Aid. There were also many individual charity campaigns.

On average, households give more now in real terms than they did three decades ago – £2.34 in 2008 compared to £0.98 in 1978. This takes account of donors and non-donors. The fact that real donations have gone up in spite of falling participation is because donor households are giving a lot more (their donations have done up nearly three-fold over the period).

However, looking at the past twenty years, the rise in donations has done little more than keep pace with rising GDP. As a share of total spending, households are giving exactly the same now (0.4%) as they did ten years ago – and as they did twenty years ago. This is in spite of big changes in charity fundraising, in tax incentives and in methods of giving. The good news about the resilience in generosity is that giving appears to be fairly recession-proof, for example. But, it may be hard to achieve the kind of step-change in generosity that David Cameron sees as part of his Big Society.