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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There's just one future for the left: Jeremy Corbyn

Labour's new leader is redefining Labour for the 21st century, argues Liam Young. 

The politics of the resurgent left comes down to one simple maxim: people are sick and tired of establishment politics. When one makes this statement it is usually met with some form of disapproval. But it is important to realise that there are two different types of people that you have this conversation with.

First there are the people I surround myself with in a professional environment: political types. Then there are the people I surround myself with socially: normal people.

Unsurprisingly the second category is larger than the first and it is also more important. We may sit on high horses on Twitter or Facebook and across a multitude of different media outlets saying what we think and how important what we think is, but in reality few outside of the bubble could care less.

People who support Jeremy Corbyn share articles that support Jeremy Corbyn - such as my own. People who want to discredit Jeremy Corbyn share articles that discredit Jeremy Corbyn - like none of my own. It is entirely unsurprising right? But outside of this bubble rests the future of the left. Normal people who talk about politics for perhaps five minutes a day are the people we need to be talking to, and I genuinely believe that Labour is starting to do just that.

People know that our economy is rigged and it is not just the "croissant eating London cosmopolitans" who know this. It is the self-employed tradesman who has zero protection should he have to take time off work if he becomes ill. It is the small business owner who sees multi-national corporations get away with paying a tiny fraction of the tax he or she has to pay. And yes, it is the single mother on benefits who is lambasted in the street without any consideration for the reasons she is in the position she is in. And it is the refugee being forced to work for less than the minimum wage by an exploitative employer who keeps them in line with the fear of deportation. 

The odds are stacked against all normal people, whether on a zero hours contract or working sixty hours a week. Labour has to make the argument from the left that is inclusive of all. It certainly isn’t an easy task. But we start by acknowledging the fact that most people do not want to talk left or right – most people do not even know what this actually means. Real people want to talk about values and principles: they want to see a vision for the future that works for them and their family. People do not want to talk about the politics that we have established today. They do not want personality politics, sharp suits or revelations on the front of newspapers. This may excite the bubble but people with busy lives outside of politics are thoroughly turned off by it. They want solid policy recommendations that they believe will make their lives better.

People have had enough of the same old, of the system working against them and then being told that it is within their interest to simply go along with it.  It is our human nature to seek to improve, to develop. At the last election Labour failed to offer a vision of future to the electorate and there was no blueprint that helped people to understand what they could achieve under a Labour government. In the states, Bernie Sanders is right to say that we need a political revolution. Here at home we've certainly had a small one of our own, embodying the disenchantment with our established political discourse. The same-old will win us nothing and that is why I am firmly behind Jeremy Corbyn’s vision of a new politics – the future of the left rests within it. 

Liam Young is a commentator for the IndependentNew Statesman, Mirror and others.