Going cap in hand to the charities

How to change the tax relief cap to help charities and the government get value for money.

The Chancellor’s budget decision to cap income tax relief has caused a hullabaloo. Wealthy donors and their beneficiaries are in open revolt, saying that charities will be hit hard by the measure. And a lobbying alliance of the wealthy and the charity sector is not something that politicians are likely to defy.

That there will be some cap seems certain. But in the face of this firestorm the government has been curiously reticent in defending its plan. Pointing to the need to curb the minor problem of fraudulent charity giving understandably angered many. There are good arguments for capping donations tax relief, which tend to get less of a hearing. A look at the evidence also points to some ways in which the Chancellor could appease the charity sector while keeping most of his savings.

So what possible justification could there be for cutting tax breaks on giving?

First it’s worth asking the question of how much charities actually benefit from tax relief on donations. This depends how donors respond. If they aim to give a fixed amount of their post-tax income, regardless of government policy, then the charity can expect to get the full value of any tax break that applies.

But what if donors want the charity to get a fixed amount – say a round million pounds? In this case, the availability of a tax top-up might cause them to cut their net donation from what it would otherwise have been. Here the donor benefits but the charity does not. Cutting relief in the first case would hit the charity, but in the second, the total received would be unchanged.

Which of these effects dominates is an empirical question. Several studies suggest that charities get significantly less than £1 for every £1 of tax relief paid out, because people reduce the amount they give in response to the top-up. The evidence isn’t conclusive but a reasonable approximation would be that perhaps two-thirds of tax relief gets to the charity. The residual ends up in the pockets of donors.

So since charities get less than the government spends on tax relief, the state has a dilemma. The cap is expected to save the Treasury up to £100m per year from charity donors. So should it spend that extra £100m on schools or the NHS, services that the electorate as a whole (not just wealthy donors) want to see provided? Or should it reverse its policy and spend that money on tax relief for only £66m to go to privately favoured charities, ranging from famine relief to donkey sanctuaries? The case for doing the latter is perhaps weaker at a time when public services being cut to the bone and ministers lose sleep about the government’s creditworthiness.

Nevertheless, the growing clamour now looks very likely to force some kind of concession from the Treasury. And here the evidence has interesting things to say about how the Chancellor could recast his cap to make sure that government saves some cash and charities maximise giving.

Recent research shows that how tax relief is offered really matters to maximising donations. Where the charity directly claims the tax rebate on behalf of the donor, as with Gift Aid, the scheme looks more like a matching proposition. You give £1 and the government will match it with a further 25p. Under Gift Aid for higher rate taxpayers, the basic rate half of their tax break goes straight to the charity in this way. But they reclaim their rebate on the other 20% - the gap between basic and higher rate income tax - through self assessment.

Field experiments indicate (pdf) that the matching design can wring up to three times as much in donations for every pound spent on the match as the tax rebate version. And this is in spite of the fact that economic theory would suggest that how the tax relief is delivered should have no impact on donor behaviour.

Yet under the government’s current proposal both parts of the donors’ tax relief will be subject to the cap. This makes little sense. The smart move for Mr Osborne would be to un-cap the tax relief that boosts giving while screwing down the cap on the rebate. Both the Big Society and the broke state would be the winners.

Please sir, if you give me 10 per cent more the government will top it up by another 2.5 points while returning between 20 and 30 percent of the increase back to you. Credit: Getty

Ian Mulheirn is the director of the Social Market Foundation.

How Jim Murphy's mistake cost Labour - and helped make Ruth Davidson

Scottish Labour's former leader's great mistake was to run away from Labour's Scottish referendum, not on it.

The strange revival of Conservative Scotland? Another poll from north of the border, this time from the Times and YouGov, shows the Tories experiencing a revival in Scotland, up to 28 per cent of the vote, enough to net seven extra seats from the SNP.

Adding to the Nationalists’ misery, according to the same poll, they would lose East Dunbartonshire to the Liberal Democrats, reducing their strength in the Commons to a still-formidable 47 seats.

It could be worse than the polls suggest, however. In the elections to the Scottish Parliament last year, parties which backed a No vote in the referendum did better in the first-past-the-post seats than the polls would have suggested – thanks to tactical voting by No voters, who backed whichever party had the best chance of beating the SNP.

The strategic insight of Ruth Davidson, the Conservative leader in Scotland, was to to recast her party as the loudest defender of the Union between Scotland and the rest of the United Kingdom. She has absorbed large chunks of that vote from the Liberal Democrats and Labour, but, paradoxically, at the Holyrood elections at least, the “Unionist coalition” she assembled helped those parties even though it cost the vote share.

The big thing to watch is not just where the parties of the Union make gains, but where they successfully form strong second-places against whoever the strongest pro-Union party is.

Davidson’s popularity and eye for a good photo opportunity – which came first is an interesting question – mean that the natural benefactor in most places will likely be the Tories.

But it could have been very different. The first politician to hit successfully upon the “last defender of the Union” routine was Ian Murray, the last Labour MP in Scotland, who squeezed both the  Liberal Democrat and Conservative vote in his seat of Edinburgh South.

His then-leader in Scotland, Jim Murphy, had a different idea. He fought the election in 2015 to the SNP’s left, with the slogan of “Whether you’re Yes, or No, the Tories have got to go”.  There were a couple of problems with that approach, as one  former staffer put it: “Firstly, the SNP weren’t going to put the Tories in, and everyone knew it. Secondly, no-one but us wanted to move on [from the referendum]”.

Then again under different leadership, this time under Kezia Dugdale, Scottish Labour once again fought a campaign explicitly to the left of the SNP, promising to increase taxation to blunt cuts devolved from Westminster, and an agnostic position on the referendum. Dugdale said she’d be open to voting to leave the United Kingdom if Britain left the European Union. Senior Scottish Labour figures flirted with the idea that the party might be neutral in a forthcoming election. Once again, the party tried to move on – but no-one else wanted to move on.

How different things might be if instead of running away from their referendum campaign, Jim Murphy had run towards it in 2015. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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