Inequality

TAX SYSTEM MEANS WEALTHY DONORS DRIVE THE CHARITY AGENDA

Wealthy charitable donors who benefit from tax exemptions for their giving are able to drive the charity agenda, sometimes to the detriment of the charities themselves. That is the central message of research by Sarah Sandford and Kimberley Scharf, presented at the Royal Economic Society’s 2013 annual conference. Their results suggest that governments may want to think again about the design of donor relief.

The study starts from the well-known observation that wealthy donors choose to contribute to different kinds of charitable causes than less well-to-do donors. The research then imagines a setting whereby donors with different levels of wealth and different philanthropic aims have to agree to and sustain a charitable cause.

Their analysis shows that the wealthier donors have far more bargaining power because they can threaten to pull their money out and fund alternative causes. As a result, they are able to force renegotiation to a new cause that is closer to their own aims, which in turn undermines the chance for a compromise with less wealthy donors and the charities themselves.

The authors argue that they way to remove this imbalance may be to remove some of the tax relief for wealthy donors:

‘It is possible that limiting wealthy donors’ bargaining power – for example, by restricting some forms of charitable donations relief for wealthier taxpayers – could constrain renegotiation and promote a compromise that benefits all donors and charitable causes.’

Throughout the world, the rich account for a disproportionate percentage of charitable contributions. In the US, the wealthiest 10% of the population hold 70% of total wealth and make 50% of total donations while in the UK they hold 56% of total wealth and make 21% of total donations.

These are large numbers: charities in the US received $212 billion in contributions from living donors in 2010; in the UK in 2012, almost £10 billion in donations were counted as part of the total income of almost £60 billion of the 368,000 charities registered with the UK Charity Commission.

Although the rich give less as a proportion of their wealth than poorer individuals do, progressive taxation means that they take a more than proportional share of the public money spent on funding tax incentives for charitable contributions.

In 2006, US taxpayers with earnings over $100,000 received 76% of the total $40.9 billion tax subsidy implied by the charitable deduction, although they made just 57% of all donations. In contrast, those with earnings less than $50,000 received just 5% of the subsidy, despite making 19% of all contributions. In the UK the cost to the exchequer of Gift Aid was approximately £1,435 million in 2012.

More…

The world is experiencing an explosion of inequality that has seen, among other things, the wealthy increasingly segregating from the rest of society with respect to the provision and use of certain services such as education and health care. This increased inequality has also heightened tensions between the philanthropic pursuits of the rich and the needs of society, prompting a debate about whether generous tax reliefs for charitable donations should be re-evaluated.

The rich account for a disproportionate percentage of charitable contributions – the wealthiest 10% of the population hold 70% of total wealth and make 50% of total donations in the US and hold 56% of total wealth and make 21% of total donations in the UK.

These are large numbers – charities in the US received $212 billion in contributions from living donors in 2010; in the UK in 2012, almost £10 billion in donations were counted as part of the total income of almost £60 billion of the 368,000 charities registered with the UK Charity Commission.

Although the rich give less as a proportion of their wealth than poorer individuals do, progressive taxation means that they take a more than proportional share of the public money spent on funding tax incentives for charitable contributions: in 2006, US taxpayers with earnings over $100,000 received 76% of the total $40.9 billion tax subsidy implied by the charitable deduction, although they made just 57% of all donations.

In contrast, those with earnings less than $50,000 received just 5% of the subsidy, despite making 19% of all contributions; in the UK, the cost to the exchequer of Gift Aid was approximately £1,435 million in 2012.

It is also well known that the wealthy choose to contribute to different kinds of charitable causes than do the poor. But even in the case where rich and poor contribute to similar causes, there is evidence that the specific varieties or ‘missions’ that are pursued by the wealthy differ from those pursued by the not so wealthy. Researchers at the University of California, Berkeley, found that ‘wealth seems to buffer people from attending to the needs of others’ and that the wealthy suffer from a ‘compassion deficit’ compared with the poor.

All of this raises the question of whether wealthy donors drive the agenda in their provision of public goods in a way that is disproportionate to their financial contributions – and are aided in this by the support of generous tax incentives. Can the wealthy be trusted to support the broader aims of civil society and should public funds be used to support them in their aims – or are they taking too much from society while ostensibly giving to it? In other words, does government support to private charity disproportionately promote the philanthropic aims of the wealthy?

These questions are at the heart of a recent research project by Sarah Sandford, a PhD student at the London School of Economics and Kimberley Scharf a Professor of Economics at Warwick University. Their theoretical research looks at whether donors with different levels of wealth and different philanthropic aims are able to agree to and sustain a jointly profitable ‘mission compromise’, which enables them to achieve efficiency savings in provision.

The preliminary results of their analysis show that there are situations where such a compromise can fail to materialise even when all donors can benefit from it. This is because, in the presence of fixed costs that are sunk ex post, wealthier donors find themselves in a comparatively stronger bargaining position, as they can credibly threaten to fund alternative missions, while less wealthy donors can no longer do so. As a result, wealthier donors are able ex post to force renegotiation to a new mission compromise that is closer to their own aims, which in turn undermines the chance for an ex ante compromise with less wealthy donors.

In such situations, the power of wealthy donors to drive the philanthropic agenda ex post can ultimately work against them, and can lead to inefficient segregation in charitable provision, hurting all philanthropic causes – both those that are favoured by the wealthy and those that are favoured by the less wealthy. It is then possible that limiting wealthy donors’ bargaining power – for example, by restricting some forms of charitable donations relief for wealthier taxpayers – could constrain renegotiation and promote a compromise that benefits all donors and charitable causes.

ENDS


Contact:

RES media consultant Romesh Vaitilingam:
+44 (0) 7768 661095
romesh@vaitilingam.com
@econromesh

Page Options