Monday 23 April 2012

Tax deductions for charitable gifts

There has been much discussion and controversy in recent weeks regarding the proposed limits on the amount of tax relief that taxpayers can receive. I am inclined to be supportive of this idea, based on the worry that this charitable relief is effectively just a means for those with large tax bills (who are generally speaking going to be among the most fortunate members of society) to choose where government money is spent. Governments are perhaps happy to allow this loss of revenue on the basis that some of these high earners wouldn’t bother earning so high if they weren’t allowed such a large say in where their taxes are spent.

Nevertheless, despite my qualms, I will assume “charitable tax deductions” can be acceptable in what follows. Accepting this alone does not imply that there is no need for reform of this position of what I will refer to as ‘tax-privilege’ for charities. 

One line of argument in favour of limiting the deductions is that a lot of the charities are bogus, and that the wealthy use them to circumvent taxation in a surreptitious fashion. The response to this is—rightly—that if members of the public know of a bogus charity it will be investigated by the charity commission and struck off. There may be charities used for corrupt purposes, but hopefully they will be found out and their sponsors end up in the dock on charges of fraud. Whether or not this is likely to ever happen, I will assume that these cases of fraud are not a major concern. 

I still think there is a strong case to be made for reform of this charitable giving deduction, and not necessarily that of a cap of the sort proposed. My proposal is that if charitable relief is to be retained, the conditions on charities receiving tax-privilege status should be much more restricted than the conditions required simply to be registered as a charity

What the public do not like, I would suggest, is that those with large earnings can direct tax benefits towards their personal agendas. Charitable gifts should be directed to improving the country, the world, or the lives of the badly off. On that we can agree. However, the conditions on becoming a charity are relatively lax. The body should be set up with some kind of charitable purpose, and must not exist to enrich its owners/administrators in the same way that profit-making companies are. This is fine, but this broad church includes charities that don’t seem to be worthy of tax-privilege status. 

Two examples spring to mind. The first is religious organizations. It seems totally unacceptable to me that people should be able to redirect tax money to their preferred religion. The second is think-tanks and research charities that are clearly political. A lot of what such organisations do is not thinking up new ideas at all but rather attempting to influence opinion, media and so on in favour of their pre-existing agenda. Propaganda, if you will. But even if it was more open-minded research into issues, it is likely to attract money on the basis that it has a particular agenda. Given that the agenda is usually that of the interests of one group of society against the interests of the rest it is particularly offensive. (And it should be noted that since the charitable deductions rules apply to the very wealthy, it hardly needs to be said whose interests they would further).

These activities are not designed to improve society or help the needy, but rather to further the interests of the donor. And directing tax revenues to particular personal interests in this way circumvents democracy without gaining the intended benefit—greater resources to help those in need.

I therefore propose that the charity commission or tax authorities should set themselves the task of separating charities into those that are, and those that are not, worthy of tax-privileges for their donors. Worthy charities are those that attempt to help the needy and improve the culture of the country. Allowing tax deductions for this is not such a loss to the country since the money goes to a good cause (even if it helps those abroad). However, there will be charities that meet standard conditions for charitable status which would not meet these more stringent criteria. 

If any charities are worthy of such tax-privilege for the benefit of their donors, it is still quite easy to identify some which are certainly not. Bogus charities for one, but also campaigning charities. Governments supporting charity is acceptable. Supporting the interests of high-earning tax payers is not.