Nothing is as constant as change, or so they say. Even something as old and straight forward as charity seems to have undergone a metamorphosis in modern times. Charity used to involve selfless giving. People used to give to help others, not for any personal benefit. Indeed, many insisted on giving anonymously. Some still do. But not if they want a tax deduction. In their endeavour to encourage charitable donations many governments have made donations to charity tax deductible. This just goes to show how considerate our political masters are.

This particular tax exemption was created to make society a fairer place by encouraging people to donate to charities. Like all tax exemptions there might be some cost to society from the exemption. It adds to the size and complexity of the legislation. It increases the amount the Government will have to raise from somewhere else. So we pay higher rates of tax in order to allow charities to maintain their tax-exempt status. But it is worthwhile, because it encourages us to give to worthy causes. That’s what governments do when they create this exemption in their tax codes. Presumably the additional givers are not donating for selfless reasons, but for the rebate.

I hear you say that there is something odd here. Why would people give money away to get less back in the form of tax deductions. Well of course they generally will not. But the deduction reduces the comparative cost of giving to charities and thereby increases the amount they get. Economic rationalism strikes again. It’s odd that those who rail against our consumerist society and the influence of economic rationalism do not call for the scrapping of charitable rebates. Presumably it has nothing to do with the preponderance of the great and the good on charity boards. There is nothing like a spot of fund raising to bring out the best in a CEO’s spouse. For some reason working for a living does not have the same kudos as working for a charity. At any rate, people are now giving for the pleasure gained from giving to a worthy cause and because part of that pleasure is almost free. This “almost free” part being the component of the donation that they get back in their tax rebate. Who says nothing is for free anymore?
So having a tax deduction for charitable donations increases the complexity of the taxation legislation and nominal rates of tax. This is a small price to pay. But this worthy distortion of the tax code has other more insidious effects. It creates a very strong incentive for bodies to register as charities. After all, what better way to avoid paying taxes? But of course the bureaucrats are wise to that trick. It’s not so easy to register with the tax office as a religious or charitable body. We can’t have just anyone legally avoiding taxes.

Now the simple tax exemption has resulted in yet more red tape. Legitimate charities have increased compliance costs in demonstrating that they exist for selfless, rather than selfish reasons. That they are not just a business trying to avoid taxes in the simplest possible manner. The government bureaucracy is not just more powerful as a result having gained the rite to determine what is or is not a charity, but larger. People are involved in assessing and monitoring applications for charitable status. These people could be doing something that actually increased societies wealth. Perhaps by employing people, who instead go to soup kitchens or rely on charity shops. But oh no. Now they are busy monitoring people’s applications to become a registered charity. Some might even be writing minutes to other public servants on how processes could be streamlined or policy amended.

Clearly there are significant costs to society from providing a tax exemption for charities. Maybe they outweigh the benefits, maybe they do not. But what is really interesting is why so few politicians ever stand up and call for the exemption to be removed. Surely some must perceive the cost as greater than the benefit. A cynic might examine the status of political parties, think tanks and other political fund raising bodies. They might find that bodies that donate or support politicians’ re-election campaigns are often registered charities and conclude that the politicians have a vested interest in maintaining their tax-exempt status. But I suspect the cynic would be being too clever by half.
The reason politicians tend not to get on their high horse and call for a scrapping of tax exemptions for charities is that they would be crucified by the media if they did so. Abolishing tax exemptions might stimulate economic activity and lead to fewer poor and unemployed people. But the only real way of helping the poor is to give them a handout; not better prospects of getting well paid work. Furthermore, not trying to get the government to help is proof positive that you don’t care about the issue.

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