More giving or more givers? The effects of tax incentives on charitable donations in the UK

Journal of Public Economics, 183

Abstract

This paper estimates the effects of tax incentives on charitable contributions in the UK, using the universe of self-assessment income tax returns between 2005 and 2013. We exploit variation from a large reform in 2010 to estimate intensive and extensive-margin tax-price elasticities of giving. Using a predicted-tax-rate instrument for the price of giving relative to consumption, we find an intensivemargin elasticity of about −0.2 and an extensive-margin elasticity of −0.1, yielding a total elasticity of about −0.3. To further explore the extensive-margin response, we propose a model with a fixed cost of declaring donations and obtain a structural estimate of that cost of around £47. We also study the welfare effects of tax incentives, extending the theoretical literature to allow for extensive-margin giving and for a fixed cost of declaring donations. Taking into account these factors, there is a case for increasing the subsidy on charitable giving in the UK. 

Research Highlight 2019

How do tax incentives affect charitable donations?

Tax relief for charitable giving is controversial. On the one hand, it creates an incentive for individuals and businesses to support charities. On the other, it effectively requires the government to contribute (from foregone tax revenue) to whatever charities are chosen by the taxpayer. Higher rate taxpayers effectively have a greater tax incentive, since the tax rate that they would otherwise face is higher.

An important practical question for the policy debate is the extent to which taxpayers respond to tax relief; are charitable contributions higher because of the relief?  This research project investigates this question. The project makes use of confidential self-assessment tax returns data in the HMRC Datalab, exploiting variation amongst taxpayers through the tapering of the personal allowance and the introduction of the 50p tax rate in 2010.  The removal of the personal allowance (by £1 for every additional £2 of income) meant that a new marginal tax rate of 60 percent applied to a range of incomes over £100,000.

The additional tax relief for higher marginal rate taxpayers is available only to individuals who declare their donations in their tax returns. But only 11 percent of taxpayers completing a self-assessment return report any charitable donations, even though surveys suggest that about 60 percent of UK population gives to charity. This discrepancy suggests that there are costs of making a declaration. The research estimates that this is equivalent to around £47, amounting to about 10 percent of the median declared donations in the data. The implied costs have a significant effect on the impact of the incentives provided by tax relief. 

Miguel Almunia,Irem Güçeri , Ben Lockwood and Kimberley Scharf ‘More Giving or More Givers? The Effects of Tax Incentives on Charitable Donations in the UK’, Oxford University Centre for Business Taxation Working Paper 19/10.