Nudging generosity or dodging tax? How charity tax breaks improve philanthropy

Beth Breeze

Director, Centre for Philanthropy, University of Kent

Keen observers of politics will remember when the five-letter word ‘nudge’ became a big deal in policymaking. The idea was that people could be encouraged by a ‘gentle push’ towards making choices that resulted in greater collective good by overcoming individual-level barriers such as lack of time. A classic example of a policy nudge was making organ donation ‘opt-out’, rather than ‘opt-in’: freedom of choice remains intact whilst vastly increasing the number of available organs from those who are willing but never get around to signing up to join a donor register.

Tax reliefs for charitable donations are often viewed as a fiscal nudge to encourage philanthropy by reducing the cost of giving, with the tax year end adding an extra time-limited prod to action. The cost of incentivising donations in the UK is around £2.8 billion each year and similar state-sponsored financial inducements exist in most countries around the world. An exhaustive review of the evidence shows that this nudge is successful, as the review’s authors summarise: “When the costs of a donation are lowered, giving increases” (Bekkers and Wiepking 2011, 932). But nonetheless the idea that public funds should be used to subsidise private giving has many detractors, from higher-minded concerns about the democratic implications of enabling wealthier people to hypothecate public funds for their preferred causes, to more populist lashing out at ‘tax dodgers’ enjoying ‘state-sponsored power grabs’.

Concerns about the tax arrangements for philanthropy are just one of many critiques of big giving that are longstanding but have recently been amplified in numerous well-received books, articles and social media comment. I offer a defence against all of these critiques in my new book In Defence of Philanthropy, but I will focus here on just the question of tax incentives which, I argue, are helpful in encouraging donors and are even more helpful for those seeking funds.

Why are donors responsive to charity tax reliefs? My research suggests this is not about tipping non-donors into becoming donors. The maths does not support that assumption: unless the tax rate is 100% it will always cost more to make a donation than to not make a donation, so those seeking to be generous at no cost to themselves will remain unmoved by tax breaks whatever their size. As one rich donor told me: “No one has ever said: ‘If I give £10,000 to this charity then I’ll get £2,000 back!’” Rather, charity tax breaks are attractive because they make donations go further, as another donor explained to me: “People dodging tax are not remotely connected to people giving money to charity. If you give £1 million to charity and you get £400,000 tax relief then you’ve ‘lost’ £600,000 of your own money. There’s something magical about saying, ‘I’ll give a million pounds but it only cost £600,000.’ But at the end of the day, £1m has gone to charity.”

So donors value tax relief because it increases the value of gifts received by charities, not because they are ‘up’ on the deal.

Tax breaks also provide those fundraising for good causes with extra tools to use in their interactions with potential donors. Those who think about philanthropy in the abstract, whether immersed in theoretical scholarship or situated on the shoutier end of social media, seem unaware that tax reliefs are helpful for the demand-side (asking) as well as – and perhaps more than – for the supply-side (donors). Tax breaks lower the price of giving and create opportunities to begin conversations about philanthropy, and they introduce a useful note of urgency. “Give now before the tax year ends!” uses similar psychology to for-profit marketing techniques that rely on time-limited offers to induce action, such as ‘Black Friday’ or the New Year sales. The difference, of course, is that non-profit nudges are intended to result in greater public good – and that good can grow in value far beyond initial expectations. For example, when Scotland’s first homegrown billionaire Sir Tom Hunter sold his company Sports Division in 1998, he explained that he created The Hunter Foundation because his accountants told him that a £10m endowment would be significantly boosted by tax breaks. That nudge set him on a philanthropic path, and his foundation has now given away over £55m, primarily to tackle poverty in Scotland and Africa. Hunter became a signatory of the Giving Pledge in 2015 and has set himself the personal goal of becoming the first Scot to give away £1bn.

Questions about democratic equality and accountability are important, and need to be debated. But we also need to understand the role of tax reliefs in relation to the demand-side as well as the supply-side of philanthropy, and to calculate their value in terms of the lifetime contributions of donors who were first prompted to think big by the existence of tax reliefs.