…Key points from my response to the Charity Tax Commission call for evidence
Gift Aid allows charities to claim tax relief – 25p in the pound – on gifts and donations made by UK taxpayers. If the donor is a 40 per cent taxpayer, further tax relief of 20 per cent (the difference between the current higher rate of income tax of 40 per cent and the current basic rate of tax of 20 per cent) can be claimed by the donor themselves (not by the charity). Gift Aid was worth approximately £1.28bn to charities in 2016-17. Higher Rate Relief was worth approximately £520m to individuals.
…An alternative to the Gift-Aid ‘match’ would be a rebate based program, as is more common in other countries. I believe that the evidence and some straightforward considerations argue against such a change.
Principally, to the extent that we have evidence, matches have been shown to be more effective at inducing donations then have rebates (Eckel and Grossman, 2003; 2006; 2008); (Scharf and Smith 2015). (There are various hypotheses for why this is, see Hungerman and Ottoni-Wilhelm, 2016); but there is little consensus.)
Furthermore, a tax rebate system would be harder more difficult to apply, and potentially not relevant for those who are not net taxpayers. (The available evidence suggests that lower and middle-income earners contribute a substantial share of charitable revenue; there is mixed evidence as to the whether giving increases less or more than proportionally with income.)
It would make calculation of this benefit more difficult for people who are unsure as to what sort of marginal tax rate they will be paying. General evidence suggests that people are more responsive to definite tangible benefits than ambiguous or uncertain ones.
A substantial proportion of funding in the UK is also raised through the donation and sales of secondhand goods through charity shops. These are eligible for Gift Aid, and the value of these can be determined in a straightforward way based on their ultimate sales prices. In countries such as the USA, ‘itemizing’ taxpayers may report the value of donated goods for tax relief; however, this is hard to verify, and conventional wisdom is that people inflate the value of these for self-serving reasons.
Gift Aid Small Donations Scheme
The Gift Aid Small Donations Scheme (GASDS) allows charities to claim a gift aid-style top-up on small donations, in situations where it wouldn’t be feasible to collect Gift Aid declarations, for example where a collection tin or bucket is used. Charities can claim up to £2,000 a year under the scheme (on cash donations of up to £8,000). GASDS was worth approximately £29m to charities in 2016-17.
I expect this to be a valuable program and a ‘plug’ in the hole that limits the effectiveness of donation incentives. There is a great deal of evidence that charitable giving (at least by smaller donors) occurs principally in response to requests for donations. Social influences on donations are also extremely important, and people seem to donate more where their reputation is at stake (see, e.g., Harbaugh, 1998; Soetevent 2005)). Donations are often connected to what psychologists call system-1 emotional responses, and analytical considerations may drive a switch to a system-2 analytical mode which may discourage donations (suggested by Karlan and Wood (2017); Paper et al. (2017); and mediating the ‘identifiable victim effect’, see Small et al (2007). I believe that in the context of these impulsive, emotionally driven, and socially pressured responses, the consideration that ‘gift aid might not be available for this’ might have discourage donations substantially. First of all it provides an ‘excuse’ to not donate or to defer consideration of this, and there is evidence that people may be drawn to these excuses and exercise motivated reasoning to avoid donating in particular contexts (Exley 2016a; 2016b; Exley and Petrie 2018; Fong and Oberholzer-Gee 2010); also see the literature on ‘legitimation of paltry donations’). Secondly, having to think about this concern (lack of Gift Aid) may lead to an analytical process that will block the emotional response and the donation. Finally, this may lead people to postpone decisions on whether to donate, and with this delay, the emotional and social impetus to donate may disappear.
What about the rate of gift aid, the standard 25%
The baseline that ‘donations will be considered as coming from pre-tax income’, embodied in Gift Aid and the higher-rate relief, would be unlikely to be the optimal rate of subsidising giving. If it were, it would seem to be a coincidence. A higher or lower rate may be favoured to achieve the maximum out-of-pocket contributions. Furthermore, rather than imposing a strict cap on the amount that can be eligible for higher-rate relief, it may be worth considering a gradual reduction in this level.