To what extent should taxpayers be able to direct which social institutions provide the best value in delivering for the public good?
In most western democracies, governments have provided the incentives of a reduced tax bill in order to encourage support for charities. The definition of charity varies, with the relief of poverty, advancement of education and promotion of religion being at the core of historical definitions. The specifics of each system vary widely but in every case, a donation to a charity results in a reduction of tax payable by an amount less than the donation. The argument for this deduction is that the charity is doing a public good and hence, deserves public support.
What prompts these musings is President Obama’s 2015 budget plan that would cap US charitable deduction at 28 percent; currently donors in the upper tax brackets can claim up to 39.6 percent. Not surprisingly, the American non-profit sector is critical of this initiative, suggesting this will have a “cascading impact” on the ability of the sector to serve the public. This is hardly a new debate. In 2012, the British government ended up backing down after including a similar “charity tax” in their budget. Given that the increased benefits that accrue to wealthier donors come as a result of a progressive tax system, it is interesting that some argue the reason to cap donations is to end the “unfairness” of having “wealthiest taxpayers have a disproportionate role in allocating public resources” through their giving choices.
A simplistic example might illustrate the point. With a 30 percent credit in place, a taxpayer who decides to donate $100 to a charitable organization is concluding that a greater good will come from $170 given to the government and charity rather than simply giving $100 to the government. (Not donating would require $100 in tax; donating means paying $70 in tax plus $100 to the charity.)
Governments, not surprisingly, don’t quite see it this way. They view the tax deduction for charities as a diminishing of their tax base. They view the above transaction as one that causes the government to have $30 less dollars than otherwise they would have. The Canadian government’s tax expenditure report records that in 2011 (the last year for which actuals are available), charities cost the federal purse $2.2 billion. One has to go elsewhere to see that this has translated into about $10.6 billion of charitable activity.
The details regarding specific tax initiatives isn’t my point here. Canada’s House of Commons Finance Committee recently undertook an extensive review of Canada’s system and Cardus made formal submissions in that process. But as in that process, the current American debate is a reminder of how so many view institutions. Government, it seems, is the primary institution that can serve the public good and somehow other institutions—including charities—are suspect when it comes to the loyalty of their citizenship. They are acknowledged to do some good (hence the tax credits) but their needs and capacity almost always seem a secondary consideration.
I see the world a bit differently. I affirm the goodness of government and the rightness of paying taxes for the things government needs to provide. But there are a good many things that need to be provided in society for which institutions other than government are much better equipped to deliver. That’s not to say the donation deduction should be either 28 percent or 39 percent in US, 29 percent or 42 percent in Canada, or whatever the numbers are in Australia, the UK, and elsewhere. Reasonable people can differ regarding the particulars. What they should not do, however, is advocate for a state-driven polity that runs roughshod and makes it more difficult for the other institutions of society to build the capacity they need to perform their essential social functions.