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.

Photo: Getty
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Lowering the voting age is the best way to protect the franchise we've fought so hard for

Empowering young people is the best way to renew civic and political engagement.

Too many believe that politics isn’t working for them. That those who make decisions are not acting in their interests. And too often, narrow interests win over the wider public interest. Our economy isn’t working either. It never will until we repair our fragile politics.

When I was leader of Oldham Council I recognised that to reform, it must open up. It needed to bring forward ideas and challenges from all those who are affected by decisions taken in their name.

We gave constitutional rights for the youth council to move motions and reports at our full council meeting. We opened up our meetings with live web-streaming and questions from all residents. And we embraced social media, combined with instant comments, which were shown in the chamber during debates.

It opened up democracy and gave councillors an insight into issues which affect young people. But two things stood out. The first was that many of these issues are the same ones which affect the wider public. But they are affected in different ways by decisions or the lack of action by government. Second, and most importantly, while we were engaging young people they had no say over who was making decisions on their behalf.

So of crucial importance to me is how we bolster democracy to weather the challenges it faces today and in the future. Recent events at home and abroad have convinced me of the importance of this. There are two separate approaches that parliament must take. Firstly, we must devolve more power from central government to local communities. And secondly, we must at all costs renew civic and political engagement here in the UK. I’ve come to believe that getting more and more young people engaged in politics is fundamental to realising this second point. And I see lowering the voting age as key to cementing this.

I hear the arguments against this loud and clear. Eighteen is the official age of independence. Eighteen is when someone forms their world view. And 18 is when reasoned, judgemental thought suddenly kicks in. On that basis, the years preceding that are presumably some kind of wilderness of rational thinking and opinion forming. Someone even tweeted at me this week to inform me that under-18s don’t know what they want for dinner, let alone how to vote.

Needless to say, I find all these points unconvincing and in some cases dismissive and patronising.

I speak with people even younger than 16 who have coherent views on politics, often a match for any adult. They even know what they want for dinner! And I am of the strong belief that empowering young people through a wider enfranchisement will speed up this development. Even better if votes at 16 is accompanied by compulsory political education in the preceding years.

So if your argument is that young people are too immature, that they lack political knowledge to be given the vote, or that they aren’t responsible enough – then I say to you, bring on lowering the voting age! As my argument is that empowering young people to vote will help overcome these challenges where they exist.

But where do other countries sit on lowering the voting age? Admittedly, among western democracies, the UK would be taking a bold step-forward. In Europe, it’s only Austria where all 16-year-olds can vote. There are some patchwork exceptions to this closer to home. For example, the voting age on the Isle of Man is 16. And this week we heard that the Welsh Assembly is considering lowering the voting age to 16 for local elections.

Outside of these scant examples, there is little precedent for change. However, we shouldn’t find ourselves cowed by this. Our past is littered with bold actions, proud speeches and even lives lost to win and defend the right to vote.

200 years ago on Tandle Hill in Royton hundreds of protestors, who had travelled from nearby mill towns like Oldham and Rochdale, gathered together. They were preparing to march on Peters Field in Manchester on a summer’s day in August 1819. What was at stake was a greater say in parliamentary decisions, at a time of famine and widespread poverty. Non-land-owning workers were entirely excluded from the franchise. By the end of the day, government cavalry had cut down 14 protesters, and injured hundreds more. In 1832 only men renting or owning valuable land were given the vote. And it wasn’t until 1918 that all men were included in the franchise.

This month we remember the 100-year anniversary of the Battle of Passchendaele. The sacrifices made during the First World War by our working-class men and boys, 250,000 of whom were under 18, was a catalyst for extending the vote to all men.

Next year we celebrate 100 years since the start of women’s suffrage. In Oldham, Annie Kenney and Emmeline Pankhurst fought tirelessly. They would both be arrested before seeing that privilege granted to only some women in 1918. Today it is sobering to think that women didn’t have the vote before 1918.

And it was only in 1970 that the voting age was lowered from 21 to 18, allowing teenagers to vote for the first time in the UK. Prevalent then were exactly the same arguments that stop 16- and 17-year-olds voting today.

While we recognise the fight of others, we fail in our duty if we believe the fight for democracy is settled.

So I draw inspiration from how the franchise has steadily grown throughout our history. And I reflect on the acts of courage, grit and determination that have won us that change. With the extension of the franchise have come the liberties, freedoms and values that make our society what it is today. It hasn’t happened of its own accord. Lives have been lost and bold steps have been taken for us to enjoy placing that cross alongside the candidate of our choosing.

This cannot be seen as a way to shift the political debate to young voters either. Many older voters, including many of my friends and family, feel that politics isn’t working for them either. Reducing the voting age isn’t the silver bullet to address that disconnect, but it is vital to strengthening connect between decision makers and those who pay taxes.

I welcome the debate on lowering the voting age. A debate about once again spreading the freedoms and responsibilities of our society to many more people. And I’ll match arguments against this every step of the way. Because I am clear in my mind that defending the franchise and extending the franchise are two sides of the same coin.

Jim McMahon is the Labour MP for Oldham West and Royton.

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