A new global index allows us for the first time to understand the relationship between tax breaks for charitable giving and the proportion of people who give money to charity.
The Rules to Give By Index, the world’s first international index of government support for charitable giving, found that the percentage of people donating money to charity is 12 percentage points higher in nations offering tax incentives to individuals (33 percent) than in those that do not (21 percent).
This groundbreaking study – the product of a collaboration between Nexus, McDermott Will & Emery LLP, and the Charities Aid Foundation (CAF) – looks at the presence of certain legal, regulatory and tax instruments that help to encourage charitable giving in all 193 nations that are recognised by the United Nations. As well as producing an index that scores countries by their legal environment for charitable giving, the partners have published a individual country report for every nation which can be found on the Nexus website.
The study compared tax incentives and other aspects of charity law to people’s likelihood to give as measured by the CAF’s World Giving Index, the international index of generosity. It found that the influence of tax incentives on giving does not depend on a country’s level of economic development. Across the economic spectrum, countries which offer tax incentives to individuals see higher rates of people giving money to charity according to the CAF’s World Giving Index, the global index of generosity.
Encouragingly, the report finds that there is an emerging global consensus amongst governments that donations to not-for-profit organisations that provide a recognised public benefit should be either exempt from or subject to reduced taxation. However, there is a disparity between support for corporate donations and support for donations by individuals. Seventy-seven percent of countries offer some form of tax incentive to corporate donors, but only 66 percent offer incentives to individual donors. This disparity is most pronounced in Low Income countries (as defined by the World Bank) where 65 percent of governments offer tax incentives for corporate donors but only 44 percent offer incentives for individual donors. In Africa 67 percent offer incentives to corporations but only 46 percent offer them to individual donors.
It may be that in nations where only a small minority of people have sufficient a discretionary personal income to enable them to give to charitable causes, governments have not thought the opportunity to be great enough to warrant the effort of creating tax incentives for individual donors. In the 26 nations where incentives are offered to corporate donors but not individuals, it is certainly conceivable that the capacity of large companies to contribute to public benefit causes might far exceed that of a population still largely living subsistence lifestyles, particularly in nations where mineral assets attract large multinational extractive industry corporations. However, the Rules to Give By Index contains information that suggests that the above rationale for incentivising corporate giving but not that of individuals in Low Income countries might be a miscalculation.
A reasonable hypothesis for studying the relationship between the presence of tax incentives for individuals and the proportion of people regularly giving money to charity might be that the effect of incentives would be more pronounced in higher income countries. The argument follows that in richer nations more people are likely to be paying tax and to be paying higher rates of tax and so will be more sensitive to tax incentives. However, the Rules to give By Index reveals that while the relationship between the presence of incentives for giving and the rate of giving is strong across the board, the effect is actually strongest in Low Income nations. As the first graph on this blog shows, the proportion of people giving money to charity every month in High Income nations that offer tax incentives to individuals is 24 percent higher (47 percent) than in those that do not (37 percent).In Low Income countries, levels of giving are generally lower but the relationship of incentives to the activeness of donors seems to be dramatic with the proportion of people giving to charity increasing by 40 percent when incentives are offered (27 percent) compared to nations where they are not (18 percent).
Clearly, it is not possible to establish causation in the relationship between the presence of tax incentives for giving and the proportion of people giving money to charity as it could be that incentives have come around as a result of public pressure in societies where charitable giving is more commonplace. Nevertheless, it would seem that in the mission to create an enabling environment for civil society, tax incentives are a priority even in Low Income nations. Even if the amount of money given is insufficient for donors to be motivated to claim tax breaks for their gifts, the idea that they could do so, and that the government considers that act to be sufficiently sacrosanct that it would allay its fiscal advantage so as not to discourage citizens, seems to be more important as a motivator than has previously been assumed.
The Future World Giving project has been created to look at how we can ensure that as literally billions of people move from a subsistence lifestyle to one of having a discretionary income, they are encouraged to engage in civil society and to lend their support to causes by giving some of their money to not-for-profit organisations. Globally, the number of middle classed people is set to grow by 165 percent by 2030 according to the OECD and much of that growth will occur in developing and transitional economies. Those of us who are concerned with the development of civil society in emerging economies should see the results of the Rules to Give By Index as a wake up call and head the warning that for the long term sustainability of civil society in those countries where development aid is flowing, we need to focus advocacy on the conditions for domestic giving, and not just of the super rich. For civil society to be powerful and accountable it must benefit from a broad base of donors who can bestow it with the legitimacy it needs to speak to power.
This need to focus on developing an environment in which all citizens are encouraged to give should not diminish the importance of encouraging the wealthy to give something back to society. While the majority of countries offer incentives for people making donations within their lifetimes, only 46 percent of countries that impose taxes on the estates of the deceased offer incentives for people who wish to leave money to a charitable cause in their will.
There are 34 countries that impose estate taxes but do not offer incentives for those wishing to leave money to non-profits or establish endowments with 15 of those nations being Low Income or Lower Middle Income nations and 12 of those located in Sub-Saharan Africa. There is a legitimate moral debate to be had about whether facilitating the philanthropic legacies of those who amass wealth through immoral activities helps or hinders the development of civil society, but disincentivizing a Congolese equivalent of John. D. Rockefeller or a Cameroonian equivalent of Andrew Carnegie through the tax system neither addresses that debate or furthers the cause of civil society.