More Giving or More Givers? The Effects of Tax Incentives on Charitable Donations in the UK

G07 Birmingham Business School University House
Monday 30 October 2017 (13:00-14:00)

Helen Harris

 Speaker: Professor Kim Scharf, Birmingham Business School

The value of tax reliefs on donations for charities, individuals and companies in 2012-2013 was approximately £2 billion, almost four percent of the charitable sector’s total income; an additional £14 billion was paid by government to charities’ for their role in delivering public services. Yet, despite the significant level of public support for the sector, the evidence base underpinning policy decisions about the design, effectiveness and administration of it remains limited. The UK’s National Audit Office (NAO) recently identified this as a critical bottleneck for improving the quality of policy decisions. They noted that there are two main “gaps in HM Revenue and Customs’ (HMRC) evidence base”: (i) in its knowledge about its charity customers and their responses, which prevent policymakers from tailoring their interventions most effectively; (ii) in underpinning evidence to support the conclusion that current tax reliefs for giving are working as intended, or that they are an effective use of public money. The NAO’s report resulted in a recommendation to Parliament that more effort needs to be devoted to building an adequate evidence base. There is some scope for government departments to address these shortcomings directly, but a robust system of governance requires input from independent research.

This paper contributes to the evidence base on the effectiveness of tax incentives for giving in the UK by providing the first ever UK estimates of the price elasticity of giving. We analyse a unique panel of UK administrative income tax returns for the period 2005-2013 to identify intensive (givers giving more) and extensive-margin (new givers giving)  donor responses to the tax price of charitable giving. Our empirical findings show that the extensive margin matters. Specifically, most of the response to a change in the tax price is at the extensive margin; we estimate an intensive-margin price elasticity of about −0.2, and an extensive-margin price elasticity of −0.8, resulting in a total price elasticity of approximately −1. These results are robust to alternative estimation methods. We also estimate the price and income elasticity of giving by income level, age groups and gender. In terms of welfare, we show that our elasticity estimates can only be rationalised as being compatible with tax incentives being set optimally if the policymaker values the public goods provided by private donations less than government provision. Alternatively, the elasticity estimates we obtain can be taken as an indication that the incentives for charitable giving in the UK should, if anything, be extended rather than reduced.

Discussion presentation and papers