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Tax Deductibility of Charitable Gifts

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Tax Deductibility of Charitable Gifts

Should all charitable gifts be tax deductible

This article, by Ken Hoffman, originally appeared in Third Sector on March 19, 1998.

The old Yankee farmer in Down East Maine says, 'If it ain't broke, don't fix it.' Is the current UK system of charitable gifts 'broke'? A number of people seem to think so, and since their names are connected with well-known opera houses and even HM's Government, it means those of us working in the trenches had better consider what might happen if the UK moves to a US style of 'tax deductions' for charitable gifts.

The US has used the 'charitable deduction' for as long as anyone can remember. In outline, it works like this. I send a cheque for $1,000 to the Massachusetts Audubon Society. They send me a receipt for that amount. At the end of the year, when I file my taxes, I deduct $1,000 from the amount of income that is subject to tax.

Let's say my salary is $30,000 pa and my taxation rate is 33 per cent. I pay 33 per cent of my $30,000 salary in tax, or $9,900. But now, after making a contribution of $1,000, my 'taxable income' is reduced from $30,000 to $29,000. Apply the 33 percent rate and my tax bill is 33 per cent of only $29,000, or $9,570.

It's the $330 difference between $9,900 in tax and $9,570 in tax that concerns us. Remember I gave away $1,000 to the charity. But after doing that, I paid $330 less in taxes. So the final cost to me of giving away $1,000 was not $ 1,000! It was $670: $1,000 (the gift) minus $330 (my 'tax savings', the amount of tax I would have paid if I had not made the charitable gift). Avoid making the classic mistake in looking at this system: it is not a one-for-one credit. I gave away $1,000, but I did not gain $1,000 in tax relief.

Still sounds attractive, doesn't it? But it raises many other questions. The key is not whether UK charities, taxpayers, and even Inland Revenue could survive the chaos of transition to a new system. Of course they will, somehow. The real question is whether a new system increases charitable giving, because that is what any responsible government should want to do. Especially if it reduces what the government has to spend.

Fortunately, the Charities Aid Foundation (www.cafonline.org) and the Institute for Fiscal Studies (www.ifs.org.uk) have leaped right in and proposed a research project. I will be very surprised if they discover any conclusive argument for one system or the other. I'm no scholar, only a fund raising practitioner for 20 years with clients in four countries. I am convinced that the overwhelming majority of people do not give more - or less - based on the tax consequences of their gift. The charitable impulse, fundamentally, goes far deeper than a beady-eyed calculation of tax advantage.