The reasons why wealth needs to be subject to additional taxation has been discussed in another Tax After Coronavirus (TACs) post, with all links being supplied there and so it will not be repeated here.
What was also discussed in that post was that the necessary short term changes to wealth taxation fall into three groups. They are, firstly, to equalise tax rates on equivalent sources of income or allowances. Second, it is by reconsidering those things that should be taxed that are not but might be if the goal of greater equality is to be achieved, and vice versa. In other words, those parts of available tax bases subject to exemptions and reliefs need to be reviewed. Third, it is about creating a more progressive tax system by changing tax rates without challenging, as far as possible, the first objective.
Restricting tax relief on contributions to charity to the basic rate of tax
In 2012 George Osborne suggested restricting the tax relief available to any taxpayer on the gifts that they might make to charity to the basic rate of income tax. The result would have been that the higher rate tax relief on gifts to charity that those who pay tax at rates above the basic rate now enjoy would have been eliminated. The reform was rejected after much protest but it would appear timely to reconsider it.
A brief explanation is required. The government offer this explanation:
If you pay tax above the basic rate, you can claim the difference between the rate you pay and basic rate on your donation. It's the same if you live in Scotland. Do this either:
- through your Self Assessment tax return
- by asking HM Revenue and Customs (HMRC) to amend your tax code
Example
You donate £100 to charity - they claim Gift Aid to make your donation £125. You pay 40% tax so you can personally claim back £25.00 (£125 x 20%).
There are three consequences of this.
Firstly, the overall tax rate of those with wealth is reduced by a greater sum if they give to charity than is the case if a basic rate taxpayer makes a gift of the same value. That is inequitable: there is no reason why tax rates should differ for this reason.
Second, this means that those with wealth can afford to give more to charity and so direct the use of the tax relief that a charity gets towards causes that matter to them more than most people can: this also appears inequitable.
Third, charities do not directly benefit from this tax relief, and that appears to make no sense when the relief is given to support charitable giving and not to reduce the tax rate of donors.
This tax relief at higher rates is poorly designed and increases inequality. It needs to be abolished now.
That reform would not harm charities: they get the same relief either way, and it makes sense that taxpayers should be treated in the same way as well in that case. Equity does suggest as a result that reform is now timely and appropriate.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
“the overall tax rate of those with wealth”- you are conflating wealth with income. The two are correlated, and each tends to lead to the other, but many people have a relatively high income (4.5 to 5 million paying income tax at the higher or additional rate) but high outgoings (rent, mortgage, etc.) and so have not built up much in terms of net assets.
“That reform would not harm charities” – I think many charities would be concerned that the number and size of donations would decrease if higher rate tax relief was curtailed. A significant number of donors would be less motivated to donate. Are any charities campaigning for reduced tax relief on charitable donations, on equality grounds? (That said, I think they would be even more concerned about any changes to gift aid.)
Like pension contributions, the concept is that charitable donations are made out of gross income, so there is less to tax in the first place. Clearly, for a fixed donation (say £100), someone subject to tax a higher rate “saves” more than someone subject to tax at a lower rate (£40 versus £20, say). The first person was paying more tax, at a higher rate, in the first place, and are probably still paying more tax at a higher effective rate after the donation. Is that poorly designed?
Also hard to see how someone voluntarily giving money away to charity “increases inequality”. Can you explain how reducing the net income of higher earners (even with tax relief, they have lost 60%) increases inequality?
Andrew
I am not conflating income and wealth – I said that this series starts by tackling the taxes on income that exacerbate wealth inequality – and this relief does
HMRC research has shown that the wealthy do not pay more as a result of the relief – I have not got time to find it again, but could
And the principle that the relief is given for a reduction in gross income just justifies the inequality – I am saying it is a false principle as a basis for tax: I am explicitly rejecting it
Just give all charities tax relief on all donations as it can be assumed all come out of taxed income in the end and their lives would be easier, and more would be raised and equity would be delivered
That is a fair principle for tax
What we have is not: it belongs to a bygone era as a principle based on bias to the rich
Richard
Tax incentives can have a major impact on charitable giving and the overarching culture of philanthropy within a nation. It’s not simply a case of any tax relief being a financial incentive to those that donate but providing a strong and coherent message that the Government recognises the key role of charities and non-profits, encouraging the public to donate.
I stress – HMRC research said charitable giving has an impact but higher rate taxpayers were not imapct5ed by higher rate tax relief in most cases – so the likely consequence would be marginal
Giving charities automatic tax relief on all donations would work much better
To play devils advocate….
To your point (1). Tax relief at the marginal rate leaves the donor taxed at same level as if they had never earned it. Someone earning 100k who gives 10k to charity pays the same tax as someone who earns 90k and gives nothing. This seems fair to me.
To your point (3). We just don’t know. It is entirely possible (even likely) that higher rate tax payers DO give more in the anticipation of a tax refund.
….. but to be frank, I don’t really care either way on these two points.
However, I DO care about your point (2).
It gets quite philosphical/theological regarding issues of the Rich determining who are the deserving or undeserving Poor….. and there is too much to unpack in a short reply, except to say it really matters and shines a light on what the State and what Charities should be doing.
I would also add that the idea that donations are purely altruistic and made with no thought of the benefits that come with such a donation is clearly false – most buildings financed by charitable donations has a list of donors. No doubt they are generous people but they ARE purchasing ‘reputation/image’ and that transaction should not be tax free.
There is strong evidence that the rich give less and knowing that they get extra tax relief does not motivate them, to pay more – they just take the relief – HMRC did this research a while ago with quite a large sample
So 1 and 3 objections don’t really stack, I think
We agree on 2
Richard, why do you persist with blatant lies which can readily be discredited:
The conclusion was:
“Tax relief in itself did not motivate the decision to give, but did seem to incentivise participants to give more generously as they knew that they would be receiving relief at the end of the year. “
“Participants felt that without the incentive of tax relief, they might reduce their charitable donations disproportionately to the amount that they would have received in tax relief.“
Pretty much he opposite of what you claimed.
Of course you won’t publish this, as you’re only interested in posting things that support your case, however wrong they might be!
With respect Brie, HMRC ould agree with me:
Donor awareness of Gift Aid was is high, with 88% stating that they had heard of the scheme prior to interview. Levels of awareness were higher among basic rate (91%) and higher/ additional rate taxpayers (94%) in comparison to non-taxpayers (83%). Among higher and additional rate taxpayers the Gift Aid Higher/ Additional Rate Tax Relief is reasonably well known (52% of them are aware), but fewer (22%) use it owing to the perceived effort required to claim tax back.
From https://www.gov.uk/government/publications/charitable-giving-and-gift-aid-research
22% are tax motivated
You are wrong in that case
I bother to do my research
Richard,
If you haven’t seen the paper, Principles for Radical Tax Reform and a Universal Dividend by Andrew Kortina, I believe it’s worth your taking a look. I’m interested in what you think of it.
https://kortina.nyc/essays/principles-for-radical-tax-reform-and-a-universal-dividend/
You aren’t seriously asking me to read that nonsense are you?
It is about flat taxes, and the creation of small government in way that would fuel inequality
I have better things to do with my time
From your first TACs post: “we do still need radical transformation of our tax system starting right now”. But I shouldn’t have just posted the link for you to read (which you didn’t), so I’ll incorporate his insights into my comments when appropriate.
I wouldn’t bother……
Your contributions and stated intentions mean I am not inclined to your comments
Well, you may not like me, but I still like you and will continue to read your blog daily and comment when I feel appropriate (even if you delete or block me). Incidentally, I thought your May 5 piece (“People and Jobs…”) was a masterpiece and in case you were not be aware of it, another link to it popped up today – https://one-handed-economist.com/?p=1828 – “2. Real asset values will fall when we factor in the loss of buying power”.
Liking is not an issue
People comment here because they come in good faith. If they don’t I cannot be bothered to engage
But I also make clear in the comments policy that this is not a place to promote oppressive policy
You sought to do so with the paper you linked
That was my concern
Why have any relief for charitable donations?
Because the work is thought to be worthwhile
In contrast to the clear comments quoted in the post from Bruce Dickinson (which entirely contradict your claims), the comments you have highlighted don’t support your claims.
It just says that few higher rate tax payers use the tax benefits (in which case abolishing it would not save any money!!)
Do you actually read what is written, or just what you want to believe is written – in this case it seems as though your ‘research’ is very wide of the mark!
I suspect that you may be unaware that I get IP address data when moderating
The chance that you and Bruce Dickson do not know each other is very low
Trolling is not welcome here. You have now been blocked.
I thought this had been discussed before: https://www.taxresearch.org.uk/Blog/2019/08/22/tax-reform-of-the-day-restricting-tax-relief-on-gifts-to-charity-to-the-basic-rate-of-income-tax/
That includes links to https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/442559/Charitable_giving_and_Gift_Aid_behaviour_amongst_better-off_individuals.pdf
Which says on page 2 “tax reliefs did have an impact on donation behaviour. Many said it was something they considered when making a donation and encouraged them to be more generous”
And then from page 22 of the one you link above: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/690609/HMRC_Report_482__GiftAid_Research_Report.pdf
“However, levels of awareness of Gift Aid Higher/ Additional Rate Tax Relief, enabling higher and additional rate taxpayers to claim back the difference between the tax rate they pay and basic rate on their donation, were moderate (52% aware) and usage of the tax relief was substantially lower (only 22% had claimed tax relief for at least some of their donations — Figure 13).”
That is, about half of them know they can claim additional relief, but only 2/5 of that half bother mainly (as the report says) because it is perceived as too difficult (bizarre really as it is just one box the tax return, but perhaps they don’t keep records to remember donations made up to 22 months earlier) or not worthwhile (depends on the size of the donation, but 20% of £100 is only £20).
It is certainly the case that *some* people know the relief exists, and it motivates *some* people to donate more (even if they don’t claim the additional relief).
Rather than focusing on inequality, perhaps the strongest point is that most of these people will give to charity anyway, so they don’t need the relief, and withdrawal of the relief might only reduce the 19% (£1.72bn) wedge on page 19 by a fraction, but most of that wedge will continue and the other 81% (£7.3bn or so) will stay much the same, and charities will just have to deal with it.
If that few bother to claim it is immaterial and contradicts the claim in my report
Which is my entirely reasonable conclusion
And the relief of poverty – a charitable objective – demands equality of treatment
What a surprise, you didn’t like an expert pointing out where you are wrong so you’ve refused to post my explanation of why you are wrong.
What sort of ‘discussion’ forum is this?
It’s a forum where points are acknowledged and we then move on
And there is no evidence that you are an expert