Tax and giving: putting donors first

I want a democracy of giving, where all those who can, help all those who can’t.” “We want the tax system to encourage more people to give to charity”. These quotes outlining a vision for philanthropy are not from Cameron or the Big Society propaganda machine. They are part of two HM Treasury reports prefaced by Gordon Brown and Patricia Hewitt at the onset of the New Labour era. These platitudes managed to translate into action, resuscitating the then faltering Gift Aid scheme: between 2000/1 and 2008/9, the value of donations given through this scheme increased by 100%. At the heart of this policy was the assumption that no financial incentives were needed to encourage donors who happen to be basic rate taxpayers – over 90% of tax contributors. It also assumed that wealthier donors do need a bit of a discount, offering them additional tax reliefs when using Gift Aid. Indeed, figures indicate that the average donation fell during period, suggesting that the scheme encouraged smaller gifts and less well-off donors.

For every plus, there’s a minus. The relative success of Gift Aid meant that discussions on philanthropy under New Labour turned simply Byzantine, ignoring decades of research on the power of taxation to affect behaviour. For most of this period, tax incentives that would provide financial benefits to most taxpayers were simply excluded from the policy agenda. Reflecting that consensus, Arts & Business (A&B) orchestrated campaigns to promote existing tax incentives, most of them for higher rate tax payers. A&B insisted that the price of giving was not an important consideration for potential donors. The many calls for Gift Aid reform and the significant amounts of tax relief that remained unclaimed (up to £8m for the arts according to A&B) were explained by policy-makers in terms of lack of awareness about the scheme or the high cost of administering it. But as Cathy Pharoah from the Cass Business School highlights in a recent paper1, charities started to see this unclaimed tax as a right, rather than as a decision a citizen makes to support a cause. Like marketing practices in the arts more than 30 years ago, discussions about tax relief started to focus on what organisations could get from donors, rather than on what donors could get from arts philanthropy.

Fast forward to 2011: a new government, and a not-so-new policy on giving. What is new is an increased willingness to discuss how tax incentives aimed at a wider pool of citizens can encourage more donations. A recent DCMS report, ‘Fundraising activity in arts, culture, heritage and sports organisations’, recommends “changes to the system of taxation to encourage philanthropy amongst corporate donors and individuals. In particular, tax relief on donations [is] thought to be desirable.”

So what can we make of this renewed interest in tax incentives? How would a focus on donors, instead of organisations, affect arts philanthropy? There is plenty of academic research on tax and giving. Not surprisingly, it presents a mixed picture of the potential effects. What is clear, however, is that using socially optimal tax incentives would mean moving away from the existing organisation-centric approach to philanthropy.

The rationale behind tax incentives is simple: it reduces the price of donations. Whilst nobody donates to the arts because they see a ‘20% off’ sign at the door, research suggests that tax incentives increase the quantity demanded for donations. This means that Gift Aid is a sub-optimal policy tool. Instead of dealing with the very complex motivations of 90% of potential donors, this scheme targets and provides incentives to cultural businesses.

Yes, the UK has a unique culture of giving. But evidence from two very different countries, France and the USA, supports the assumption that tax policies change behaviour. Both countries have found that if they want to increase private donations, tax incentives do the trick. In the UK, research shows that giving amongst the wealthy goes up at the end of the tax year. If the elites are making good use of charitable tax breaks, why not give the rest of us the same option?

There are always limitations to any policy instrument. Evidence from the USA and particularly France also suggests that the increase in donations can be smaller than the foregone government revenue. So, cultural organisations are likely to win (receiving additional funds), but the rest of society is likely to lose (from lower tax receipts). What these calculations do not take into account is that a more democratic form of cultural funding would reduce the need for fancy and complex public funding bodies, producing savings for the Treasury and liberating money for actual arts services.

‘Tax and giving’ is an immensely complex issue. What is clear to me is that if we are serious about increasing participation of all citizens in the arts, tax policies that do not consider their motivations are simply sub-optimal. Reforms that focus on reducing paperwork for charities miss the point. Tax incentives are about donors. They are likely to increase the level of cultural services for people, without unnecessary monitoring and evaluation processes. More important, they would empower a wider pool of citizens to decide on the cultural offer of this country.