U.S. Charities’ Tax Deduction Fears Playing out in U.K.

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April 10, 2012; Source: BBC News

The fear of many U.S. charities is precisely what is playing out across the big pond. In the U.S. charities are worried about the competing budgets presented by President Obama and Republican Congressman Paul Ryan. Obama’s budget calls for capping the charitable donations of the superwealthy, a proposal that even his own party won’t buy, and making sure that rich people pay a tax rate of at least 30 percent (the “Buffett Rule”), ostensibly by capping tax loopholes and other mechanisms, but somehow holding the charitable deduction harmless. The Ryan budget, recently passed by the House of Representatives, says nothing explicit about the charitable deduction, but imagines reducing the deficit not by raising taxes on the wealthy, but by slamming the door on loopholes. Between the Buffett Rule popular among most Democrats and the loophole closing popular among many Republicans, some charities wonder how all of that can be accomplished unless a cap is placed on charitable tax deductions—which is what is now being proposed in the U.K.

U.K. Chancellor of the Exchequer in the conservative government of Prime Minister David Cameron has taken a two-pronged approach to dealing with the wealthy—calling for an Obama-like cap on tax-deductible charitable giving (limiting claims for charitable giving to the greater of £50,000 or 25 percent of the individual’s income) and attacking the charitable donations of the rich as, in some cases, tax avoidance. Chancellor George Osborne said he is “shocked by the scale of legal tax avoidance by multi-millionaires,” according to the BBC. His shock came after reading a confidential study by the Revenue and Customs ministry revealing that “the use of tax reliefs on charitable donations was among the three tax loopholes used to legally reduce income tax bills.” It’s a little hard to imagine that Chancellor George Osborne hadn’t been aware of the propensity of the wealthy to let charities, rather than government, distribute portions of their wealth, but so be it.

Osborne has been savaged in the press for the proposal to cap charitable donation tax relief and for his criticism of charitable giving by the rich, notably by philanthropist Dame Stephanie Shirley, who told the BBC, “To look at philanthropists as if they were just being tax avoiders is really rather disgusting.” The chief executive of the Charities Aid Foundation, John Low, said that charitable giving “is not a ploy to save tax.” Part of Osborne’s tax dodge critique is his charge that, “In certain instances they may be giving to charities and those charities don’t, in all cases, do a great deal of charitable work.” Sounding like Obama promoting the Buffett rule, Osborne said, “We don’t think it is right that someone on a very high income is paying far less tax than the average family in this country.” How can President Obama or Prime Minister Cameron make sure that the superwealthy pay higher taxes than Buffett’s secretary if the rich can take virtually unlimited deductions, legal or extra-legal?

British charities are reportedly furious and organizing major opposition to the proposal, in part, it seems, because they had bought into Cameron’s Big Society plan of private philanthropy taking the place of some of the government’s social welfare spending. The opposition to the proposed “tycoon tax” doesn’t come at a good time for the Cameron government, especially as it heads into convening a “giving summit” at 10 Downing Street this spring. Representatives of both the National Theatre and UNICEF reported that unnamed large donors were reconsidering their planned gifts as a result of the government proposal. Other big charities are warning about the dire consequences to charitable giving from this proposal. Their public statements won’t make for a fun time at the summit.

What is likely to happen? With increasing opposition within the cabinet, Osborne and Cameron will probably back off the idea, just like President Obama has. Once again, in both the U.S. and the U.K., despite the studies that suggest that the charitable giving of the very wealthy is not particularly tax-sensitive, the charitable sector finds its interests in line with high-income taxpayers, trying to protect and, in some cases, even expand the incentives for the wealthy to give. –Rick Cohen

  • Karl Wilding

    The introduction of the cap on tax reliefs to a system that is already less generous than in the US has likely been the result of horse trading between coalition partners at 3am in the morning. We believe that not even the part of government responsible for charities (or other parts trying to encourage philanthropy) knew about it. The story of why it is necessary and the detail of how it will work appears to have changed every day. It has absolutely the feel of something made up as we go along.

    There’s nothing wrong with everybody paying their fair share of tax – and those with the broadest shoulders should bear the heaviest weight. But the narrative here has directly equated giving to charity with tax evasion. There is no recognition that in the UK giving to charity still represents a net cost to philanthropists after the tax break.

    Those of us asking for a change of heart recognise that tax loopholes are a bad thing. We are not suggesting that they shouldnt be closed. But there needs to be a distinction between reliefs for private gain and reliefs for public benefit. They are not the same.

    Best wishes
    Karl Wilding
    NCVO, England.

  • rick cohen

    Dear Karl: Thanks for the additional information. It struck us from simply reading the articles we did that there was dissension within the government ranks and some ginning up explanations and justifications as the government fended off challenges and critiques. We wonder about the U.S. charitable giving cap that President Obama proposed, whether there was similar dissension within the Obama Administration. Thanks again for the information.


  • Carl Allen

    A point of note with charitable tax reliefs is that philanthropic individuals are now deciding what services to support but the services are now approaching the realm of public sector services and not community services or charitable services.

    Going down this path does require consideable reordering of an awful lot of norms.