Say ‘tax-deductible charitable donations’ three times fast!

A recent article on the Economist website discusses tax-deductible charitable donations, posing the question whether this is the most cost-effective way to fund charities, or merely a lurk whereby the wealthy can get the state to subsidise status purchasing.

Go read it, it’s really good. Then come back here, and over the fold we can discuss alternatives

(edit: I was a bit lazy on the research for this post, mainly because I used the post to develop the idea. For more info, see comment #2 below; the Productivity Commission report that is linked to is particularly useful.) 

I found the discussion around the effectiveness of tax exemptions in generating even bigger donations (ie a multiplier effect) interesting, particularly when asking whether there is actually any mulitplier.

However, as these studies have become more sophisticated, the consensus estimate of the tax-price elasticity has diminished to significantly less than one. This shift matters: at less than one, an additional dollar in incentives for giving generates less than a dollar’s worth of donation. In such a situation charities need to produce more bang for the buck than state spending to justify their perks.

It would be interesting to see this tested in Australia.

More important, I thought, was the democratic impacts of tax exempt charitable donations.  The article quotes economist Charles Clotfelter in saying:

The American tax system, he points out, “gives the wealthiest taxpayers a disproportionate role in allocating public resources.” In 2008, individual Americans with incomes over $500,000 (who make up less than 1% of taxpayers) accounted for 18% of all income and made almost a quarter of all charitable donations. By contrast, the two-thirds of taxpayers with incomes under $50,000 earned about 20% of total income and made about 20% of all donations.

This is important because rich people, people on middle incomes and poor people donate with different priorities. Which wouldn’t matter, if donations are being made from individual’s own money. However, when the donation is tax-deductible, a percentage of that donation is actually state money; in Australia in the 2011-2012 tax year, an earner on the top marginal tax rate making a $1000 tax-deductible charitable donation was only donating $550 of their own money, the other $450 was coming from the tax coffers.

An income tax deduction for an tax-payer is a tax expenditure for the state. It’s a payment from the Government, favouring those who pay higher marginal tax rates. Which could be ok if there are good policy reasons for the donation, but it can also be a tricky way of hiding government spending on higher income earners. If you were that way inclined.

The short version of the story above is that we are giving rich people more decision-making over the expenditure of government money. This weakens our democratic principles.

We need to test whether tax exemptions in Australia encourage significantly higher donations overall. If there is no clear and significant multiplier, than we need to get rid of the tax exemptions.

Sounds tricky, right? People love being able to personally choose the charity they give to. The ability to do so from your own funds would not be affected, but redistributing the tax expenditure decisions from individuals to the Government is not very sexy.

Imagine how the charities would react to this lost revenue stream, and voters could be expected to support the charities, most of whom do very important work in the community, fulfilling welfare needs that the Government has shirked responsibility for.

But, I think there is a politically viable alternative. In the place of tax exempt charitable donations, we could implement a scheme that gives every tax payer the ability to donate an equal amount of their tax to a registered charity.

An option could be offered in tax return forms to allocate 1 (donation unit) to a favourite charity. The value of one (donation unit) would be worked out every year by taking the current value of tax expenditure on tax exempt charitable donations (with appropriate growth over time) and dividing by the number of participants in the scheme (or an estimation).

Just say 1 (donation unit) was worth $50, then the first $50 of the tax of everyone who paid $50 or more tax that year could be allocated by ticking a box on your tax return and writing in the name and registration number of your favourite charity.

The same amount of funds would be donated to charities overall, however on a basis more closely resembling one vote per person.

I acknowledge that under this scheme anyone not paying at least $50 tax would not be included. They could be included by allowing a similar option to people relying on government benefits to access the scheme through Centrelink.

Of course, amongst the charities there would be winners and losers. Those favoured by the wealthy would lose donations to those favoured by other income groups. I have no qualms with this, I believe that under the current system some charities benefit disproportionately over others by virtue of their support amongst wealthy donors

Of course, if there was not a significant multiplier effect under the current tax-deductible charitable donations scheme, the transfers would be minimal.

Under this alternative scheme, there would be more equal allocation of government funding towards charities by different income classes; the would be no loss of funding to charities overall. For these reasons, I think it’s worth considering.

3 responses to “Say ‘tax-deductible charitable donations’ three times fast!

  1. Below is a twitter exchange with ‏@bronya_l, who was happy for me to paste these here for response. Apologies for the difficult to read format (note: the @… indicates who the comment is directed to, rather than who is speaking):

    @trnltionsblg correct me if i’m wrong, but your idea seems to be about “levelling the playing field” between different charities
    @trnltionsblg by determining how much each donor can give? That doesn’t seem to make sense in context …
    @trnltionsblg … where charities have widely different goals eg aid/watch vs anglicare. And many receive govt tenders of course
    @trnltionsblg which is where they actually compete with each other and claim to be doing work the whole society collectively asks them to do
    @bronya_l it’s about levelling the playing field between citizens deciding where gov’t funds are spent
    @trnltionsblg but does that matter? How much money are we talking about? Australians aren’t famous for their charitable donations
    @bronya_l the target is tax expenditures, not charity reform.
    @trnltionsblg but at cost of cutting funding to charities? What if say aid/watch only survives cos of some random rich lefty?
    @bronya_l reinforcing privilege by allowing wealthy people more say in allocating gov’t funds matters to me, yes.
    @trnltionsblg Surely there’s a better way – and this is definitely not a major way the tax system reinforces privilege.
    @trnltionsblg Most privileged people don’t give large donations and don’t give a toss.
    @trnltionsblg also need to consider other matters eg union membership is tax deductible
    @trnltionsblg and it could be that ability is more meaningful (subjectively) for poorer people
    @trnltionsblg I don’t know but seems to me rich ppl would just evade tax in other ways and not bother with charity even more.

  2. The more i’ve reflected on this post, I’ve come to realise that under the conditions stated above, the transfers between charities can be expected to be negligible. The real impact will be the transfers of Government expenditure from the tax exemptions, towards charities. So the overall funding towards charities would be expected to increase.

    I did a quick look to find what the size of this transfer might be, it seems most research is interested in the size of overall giving rather than the cost to the Government. I’ll have a look through the budget papers later. However, we do know that claimed deductive giving in the 2009/10 tax year was $1.9 billion (, and that 38 cents in the dollar is a reasonable guesstimate of the Governments contribution towards that ammount (on 2006/7 figures pg 34), so a really rough estimate would give us a transfer in the area of $722million towards charities annually.

    The key quote from the above post is:

    If there is no clear and significant multiplier, than we need to get rid of the tax exemptions.

    More plainly, if the removal of tax deductions does not influence the rate of giving, then here is an alternative way to spend the money.

    According to the Productivity Commission, it is not clear that tax deductions generate additional giving in Australia:

    The responsiveness of Australians to tax deductions for donations to DGRs is not well understood. This is due in part to the fact that most Australian data on giving does readily not lend itself to price elasticity analysis. ( pg 23)

  3. So, in response to @bronya_l’s questions:
    1. The aim of this proposal is about levelling the playing field between citizens deciding where gov’t funds are spent.
    2. Non-deductible donations would be unaffected.
    3. My rough questimate is $722million annually.
    4. This would not cut funding to charities, it instead aims to increase funding to charities by around $722million per year.
    5. If an individual charity is relying on the goodwill of one wealthy person to survive, that organisation is already in a very tenious position. I would hate to see a system that protects one organisation instead of injecting significant additional funding into the sector. What about all the awesome new charities that could exist with the extra funding, or existing charities that could expand existing programs with the additional funding? And have that funding allocated by all income groups, not simply by rich people?
    6. Union fees are deductible as a work related expense, not a charitable donation. So not affected by, nor relevant to, this proposal.
    7. People who pay lots of tax (or otherwise liable to pay lots of tax…) will always try to reduce thier taxable income. They’ve managed to hide many of the ways that they do so. That’s why it is important to identify those lurks, and close them.

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