The Blog

We Must Protect Philanthropy From the State

Rather than undermining a cornerstone of charitable giving, the government should be thinking of how it can reduce the tax burden on charities.

I was lucky enough to attend Bristol University. My lectures and tutorials were held in the Wills Memorial Building. I lived for my first year at Wills Hall. Whenever I walked into lectures in the morning, I walked under the sun in splendour, proudly emblazoned on the arms of the Wills family and incorporated into the University arms. Without the Wills family, my university would never have come into being.

Similar stories can be told about colleges and universities throughout this country. But the early examples of Cardinal Wolsey, Lady Margaret Beaufort, Sir George Downing and others had perhaps the greatest influence on the North American colonies and, latterly, the United States. The Carnegies, Vanderbilts and Rockefellers are not merely a part of 19th century American history. Their names are written into the bricks and mortar of New York and other great cities, forever associated with the creative arts, education, health and high finance.

The acts of individual philanthropy of these individuals and families may not always have been driven by the highest motives. Perhaps they were inspired by lust for eternal glory, with their college - bigger and better than the rest - guaranteeing their immortality (although poor Cardinal Wolsey will have been disappointed)? Perhaps they were motivated by eccentricity, funding only pet projects inspired by philosophy or theology of doubtful provenance?

What of it? By their acts, individual and collective, they have provided for the cultural enlightenment, the education, the health and the community identity of millions. They have truly benefited mankind.

David Cameron launched his general election campaign with a call to the 'Big Society'. This concept, though sometimes derided, has been at the heart of the coalition policies. It is inspired by the liberating message that society should never be mistaken for the state. That individuals and communities act most creatively and productively when they are free to decide their own fate and that of their communities; when allowed to make use of their resources, generosity - even their lust for glory - for the greater good. It is no new message. It is, in fact, the golden thread of conservatism; an idea going back well beyond Edmund Burke's 'little platoons' to Aristotle and his conception of the organic nature of communities.

It is against this background that the treasury has won its fight to tax charitable donations of more than £50,000. The rationale - that individuals somehow benefit from donations by reducing their tax liability - is flawed. While they indeed reduce their liability, philanthropists also significantly reduce their income through their generosity.

Suppose a businessman donates £100,000 of his income of £500,000 to charity. He would have paid tax on £400,000. At today's rates that will be around £177,000 (£8,000 at the lower rate (20 %) for the first £40,000 (for the sake of simplicity); £44,000 at the 40p rate; and £125,000 at the 50p rate). His net income (less the donation) would therefore stand at around £223,000. Under the reforms, half the donation would be tax free. The donor would therefore pay tax on £450,000, which at today's rates would amount to around £202,000 (£8,000 at the lower rate, £44,000 at the 40p rate and £150,000 at the top rate). His net income (less the donation) would amount to £198,000.

Significantly, were our donor to decide not to donate anything to charity, he would pay tax of £237,000 (£8,000 + £44,000 + £175,000 (50 % of £350,000). His net income, however, would be £263,000 - £40,000 more than it would have been had he donated and received tax relief on the whole of his donation. These figures would be starker still were our hypothetical businessman to earn and donate considerably more.

That has to be the worst tax dodge ever invented.

So if this isn't - cannot be - a true tax avoidance measure, what is it for? Some have suggested that individuals benefit from donating to foreign charities closely connected to their interests.

If this assertion is correct - and little evidence has been provided to support it - there is a simple answer: allow tax relief only on donations to UK registered charities. It is perhaps reasonable to assume that the Charity Commission is able to ensure that no charity is used as a vehicle to benefit an individual's life-style. But, surely, the real answer is that this measure has been imposed only to increase the revenues of the State. Whether this is achieved by reducing the income of the so-called one percent or that of charitable institutions appears to be of no object. HM Revenue and Customs will benefit; the treasury will be happy.

It is difficult to think of any measure more inimical to the Big Society message: that society is more than the state; that individuals and communities are best able to resolve their problems; and that individuals should be encouraged to take responsibility - and the initiative - for their own communities. Whether or not it actually achieves much of an increase in revenue, it is a measure that will distribute money directly from the charitable sector to the state, to spend as it knows best: wastefully, unproductively and at the worst possible value.

Rather than undermining a cornerstone of charitable giving, the government should be thinking of how it can reduce the tax burden on charities: for example by exempting air ambulance fuel from VAT (see this link for a petition to do this) or on other necessary purchases. To encourage charitable giving is to encourage care for the disadvantaged, cultural enlightenment, education and the enrichment of one's community. To give - and to encourage others to give - is one of the highest civic virtues. Those who do so should be cherished, not treated with contempt. And George Osborne should think again.