The charities
stress how much they stand to lose, the large donors threaten to donate less in
future, and the government points to the way in which charitable giving reduces
the effective tax rate of some of the very rich. And it seems to me that they’re all correct,
despite drawing different policy conclusions from their differing interpretations.
If I correctly
understand the tax rules concerning donations, the sums turn out to be
surprisingly complex; but let’s take the grossly simplified scenario of two
millionaires, M1 and M2, each of whom receive £2 million per annum. M1 decides to ‘keep’ all his money whilst M2
decides to give half of it away to charity.
And let’s assume, again for simplicity, that the effective marginal tax
rate on the whole of their income is 50%.
M1 gets to keep £1
million and the Government gets £1 million in taxes, nice and straightforward. His tax rate is clearly 50%, and he has a
million pounds left over to spend.
M2 pays £1 million
to his favourite charity (which then gets a tax credit from HMRC on the basis
of an assumption that tax at basic rate has already been paid, meaning it
actually receives £1.25 million). He’s
already paid £1 million to the Government in tax, leaving him with nothing, but
he can then reclaim tax at the remaining 30% on the grossed-up £1.25 million,
so the Government repays him £375,000.
In total, therefore, he’s paid only £625,000 tax on his £2 million – an effective
tax rate of only 31.25%, and he has to struggle along on a mere £375,000 for
the year.
(And the government
has received only £375,000 net – around a third of what it got from M1, which
probably highlights their real problem.)
According to the
government, M2 is a bad guy, because he’s reduced his effective rate of tax to
less than those on smaller salaries will be paying, whilst M1 is a good guy
because he’s paid his full whack of tax at 50%.
But which is the better citizen (leaving aside the question of whether
either of them deserve to receive £2 million in the first place)? It’s far from being so clear cut.
Part of the answer might
depend on what the chosen charity or charities do, as well as on the
perspective of those making that judgement.
From my perspective, a donation of £1 million to Oxfam looks a lot
different from a donation of £1 million to another of the UK’s major charities, Eton School. (And in the second case, my judgement might
be further coloured if the donating Millionaire sent his progeny to said school,
effectively gaining some personal, or family, benefit from his ‘charitable’ donation.)
That, though, is
really an argument for reviewing the basis on which charitable status is
bestowed on organisations, rather than about the tax relief on donations to charities
per se.
The more significant
question for me is that whole principle of tax relief on charitable
donations. I don’t blame charities for
wanting such a system, nor for making the most of it. And I can understand why governments (of both
parties) have used the system to try and encourage more charitable donations –
after all, things done by charities mean that they don’t need to be done by
government. Voluntary donations are always more popular than involuntary taxes.
But the granting of
such generous tax relief means that our friend M2 is actually donating only £625,000
of his own money, and another £625,000 of money which would otherwise go into
the government’s coffers. Is it really
his to give? That’s a much more challenging
question than the Chancellor has been prepared to ask.
Posts
