Tax incentives encourage people and businesses to give more to charity, but are all too often skewed in favour of the wealthy or causes favoured by governments, according to a report by the Charities Aid Foundation (CAF).
People are significantly more likely to have given to charity in the past month if they live in a country which offers tax relief on donations – like the UK's Gift Aid scheme - than if they live somewhere which does not, states CAF.
Donation States - a study of 26 developed and emerging economies - compares the way tax incentives for charitable donations are offered across the world. CAF is one of Europe's largest foundations and supports charities worldwide.
Incentives are widely used by governments to encourage giving to charity, but regular basic rate taxpayers often have less access to generous incentives than wealthy people and companies. In some countries excessive red tape creates major barriers to people on moderate incomes taking up tax reliefs at all.
While focusing incentives on those with the greatest ability to give money may appear pragmatic in the short term, it risks inflicting long-term damage on charities and discouraging giving by the majority if incentives are perceived to be unfair.
The report also found that, in some countries, governments only offer incentives for causes that promote their priorities. Such favouritism risks damaging the long term development of a healthy civil society.
Two-in-three countries worldwide offer tax incentives on charitable donations but little comparative research has previously ever been undertaken into how they work.
The CAF study analyses the tax regimes and incentives of 26 countries covering six continents ranging from the UK and United States, to Nigeria and Bangladesh. It sets out a series of recommendations for making such schemes more effective and highlights the need for them to be as simple, open and progressive as possible.
The findings in the report include:
Greater numbers of people and businesses give to charity in countries which offer tax incentives on donations. People are 12 percentage points more likely to have given to charity in the past month if they live in a country which offers tax relief on donations than if they live somewhere which does not.
The value of tax incentives appears to have a direct impact on how much people give, with more money given when the value of tax incentives increases. Incentives are most effective in nations with higher rates of income tax.
Corporations tend to get more and bigger tax incentives than individuals. 77 per cent of countries offer tax incentives to businesses making charitable donations compared. 66 per cent offer incentives to individuals.
In some countries, tax incentives are being used to sideline parts of civil society which do not conform to the government's agenda.
The report's author, CAF International Policy Manager Adam Pickering, said: "Tax incentives are worth many billions of pounds to good causes worldwide and it is a great thing that there is such a strong international support for charitable giving being incentivised in the tax system.
"Such incentives are not the biggest motivation for people to give – and nor would we want them to be. But it is clear that they can be an effective way for governments to encourage people and businesses to support civil society.
"As we look to build the capacity of charities to do good across the world, there are important lessons which can be drawn from the benefits and weaknesses of the diverse range of tax incentive schemes in different countries.
"Crucially, it is important that they are easy to understand, non-politicised and progressive. This means that governments should not cherry pick favourite causes, and that incentives should be just as generous to people on moderate incomes as they are to the wealthy and big businesses. If incentives are seen to be stacked in favour of an elite few, this could have a chilling effect on mass engagement in charitable giving in the long run."
A series of recommendations for making tax incentives schemes effective. These include:
Equality of causes. All causes should be incentivised under exactly the same terms. It should not be for governments to decide which types of causes qualify. Charitable giving cannot be used to compensate for public service cuts.
Equality of incentives. Incentives should, as far as possible be the same for companies and individuals. Governments should also strive to ensure that incentives are not seen to give a disproportionate benefit to the wealthiest in society. While tax deductions are the most common method of incentive, tax credits are the most progressive. These ensure that those on the lowest incomes do not endure the highest cost when donating.
Claiming incentives needs to be easy. Complex arrangements make people less likely to claim. Where possible, hybrid systems – which combine tax credits and tax deductions – should be avoided.
Low tax economies should offer more favourable incentives in order to offset the relatively lower value of tax that can be claimed back. This can include removing caps on the total amount which can be claimed, or offering credits at above the highest rate of tax.
In countries where tax expenditure must be limited, for instance in some developing nations, government should resort to caps rather than limiting eligible causes.