The Social Workshop

This BBC article is just one of many discussions in the media which, in one journalistic breath, refer to the debate about whether there should be a limit placed upon untaxed charitable donations and tax avoidance.

Let’s be clear on what the issues really are.

First of all, charitable giving does not amount to what is generally referred to as “tax avoidance” or “tax dodging”. This is because the taxpayer is not better off as a result of giving money to charity.

Imagine I earn £100,000. I have no (other) tax deductible expenses. If I don’t the money to charity I am left with nothing. If I don’t donate the money to charity, I get to keep about £70,000 because almost £30,000 will come out in tax. I am clearly not personally financially better off donating the money to charity.

Compare this, say, to putting money into an ISA, a pension fund, or investing it in an off-shore company in a manner which means I do not pay tax on the money (just as I do not pay tax on the money if I pay it to charity). This time I do benefit from the fact that tax is not levied on my £100,000 - I benefit financially from my own pension fund, I get to keep 100% of the money I invest in an ISA (up to the tax-free limits, of course), and the point of my off-shore investment is that I am not taxed on it (or at least I am taxed at a much lower rate).

Some such activities are lawful, and indeed encouraged by government policy. Other similar activities are not lawful, or at least are borderline. It is these which we might call examples of “tax avoidance” or “tax dodging”.

This is of course a remarkably simplistic account. But the point is this: it simply does not help to have a genuinely productive debate when the issue of whether or not tax-free charitable giving should be capped is merged with issues such as “tax avoidance” and statistics in relation to what percentage of high earners’ income on average is paid to the government by way of taxation in a sensationalist fashion.

There are of course important debates to be had. Most obviously, should government policy discourage, or limit, charitable spending in order to ensure that it has control over how money spent for the public good is allocated?

This is a genuinely interesting issue.

Some say, for example, that charitable spending is a more efficient way of contributing to the public good. Others, often deploying the slippery-slope argument, say that it should not be for individuals to determine how publicly directed money is spent: only government can asses a society’s needs in a holistic fashion in order to determine how public money should be spent. By giving to charity, the wealthy deprive government of access to funds to pursue government policy and instead decide for themselves the worthy beneficiaries of their funds.

Other supporters of a limit on tax-free charitable spending cast doubt over the worthiness or perhaps even genuineness of recipients of charitable funds. If there is substance behind this concern, however, surely the answer is to improve the regulation of charities. It is important to recognise in this debate though, that charities are already highly regulated and charitable status must be established by each charitable body to the satisfaction of the Charities Commission.

It is also interesting to observe, as those who have spent any significant time in the US would find it difficult to miss, that charity and philanthropic activities are a pivotally well-entrenched aspect of society in the States. Entire schools, colleges and universities thrive on the benefits of philanthropy, as do any number of world-renowned arts organisations. Other charitable endeavours tackle problems of homelessness and poverty in a systematic and widespread fashion.

I express no view on the relative merits of charitable endeavours on the one hand and government spending on the other. They are clearly not mutually exclusive in that charitable spending at least to some extent curtails the need for government spending and vice versa.

The useful debate to be had in the context of these issues is not, however, about general concerns as to whether or not “tax avoidance” or “tax dodging” is a good thing or even how much tax rich people pay.