Should you subsidize my charity?

On aggregate Canadians are a generous bunch, donating over $10 billion to registered charities.[1] Doing so, however, relies in some part on a generous tax system that sees the Canadian government subsidize our respective donations to the total tune of $2.5 billion.[2] That subsidy means that you, in effect, subsidize my choice of charity.

Now if giving were evenly distribution across all donors than there’d be little to discuss – as everyone would get a similar share of the subsidy. However as it stands, 82% of donations are made by 25% of the giving population. And the top 10% of donors make a whopping 62% of total donations. [3]

If one assumed that tax “subsidies” flow in equal proportion to donation size, that means that 62% of the $2.5 billion tax “subsidy” is returned to those who give over $1000.  However, given our progressive tax system, those at the top will actually see a greater return than those at the bottom who pay less in taxes to begin with, thus creating a regressive use of tax revenues. [Moreover, as my friend Sean notes in the comments below, small donors will only receive a 15% rebate, while donations over $200 are eligible for 29%.]

Now there’s two ways to looks at this:

1-      The subsidy incents giving that would otherwise not exist, i.e., I give because I get a tax receipt.

This argument is used a lot amongst larger donors – I’ve had it told to me twice in the past week during a foodraiser for the local foodback – yet only 13% of self-identified donors say they do so for the tax credit. [4] Other sources, notably the Statistics Canada Annual Giving Survey, put this number higher at 23%.  However, nearly fifty percent of donors don’t even request the credit.

Would larger donors actually exit if the tax credit was removed?  A recently published paper by Robert and Michelle Yetman at the University of California suggests that, in the US, tax incentives have little or no effect on donations to charities in the fields of health, human services, or public and social benefit, but they do influence giving to organizations devoted to animals, arts and culture, education and the environment, as well as to private foundations.

One would hope that these findings indicate that donors are committed to causes, no matter the tax benefits involved. However I imagine it’s likely that a reduction in the tax incentives would cause a drop in donations for some large/mid-size donors.

2-  A second view is that the tax credit subsidizes the wishes of a small share of the population at the cost of broader public goods. If I want to direct my personal dollars to a cause, why should others (and the general public purse) be forced to support my giving? Moreover, given where the majority of donations are directed, to religious organizations (46%)[5], should all Canadians be subsidizing giving that may come with values-laden strings attached? I suppose the counter to this system would be to have public money divvied up by bureaucrats – however is this any more accountable / representative?

Evidently, those two contrasting views don’t offer much in the way of middle ground. We need significant donors to participate but we’d certainly prefer to do so without giving them so great a share of decision-making on public dollars. Can we reduce the tax scheme to cap rebates at a certain level without adversely affecting total donations? Can we allocate public funds in a manner that is more representative of the entire population? Given the advent of programs such as Kickstarter and IndieGogo that use crowdfunding to raise capital, could similar processes be used to allocate public funds from a charitable tax rebate fund?

I don’t pretend to know the answer here – I just find it strange that others are made to subsidize my charitable choices. As a argued with a colleague last week, I don’t need that $6 back on my $20 donation to cause x, nor do I think he should indirectly subsidize my choice of charity. I choose to give $20 or $100, not $14 or $75. And while I can acknowledge that some people love to lessen their taxes, if you’re in a position to be a sizeable donor, then do you really need it? I for one would much rather it be pooled to provide sustainable and reliable funding for organizations/projects/budgets that need it.


[1] http://www.statcan.gc.ca/daily-quotidien/090608/dq090608a-eng.htm

[2] http://www.oag-bvg.gc.ca/internet/English/parl_oag_201010_07_e_34290.html#ex1

[3] Source: Caring Canadians, Involved Canadians: Highlights from the 2007 Canada Survey of Giving, Volunteering and Participating, Michael Hall, David Lasby, Steven Ayer, of Imagine Canada and William David Gibbons, Statistics Canada, 2009.

[4] http://www3.carleton.ca/casr/The%20Impact%20of%20Tax.pdf

[5] Source: Caring Canadians, Involved Canadians: Highlights from the 2007 Canada Survey of Giving, Volunteering and Participating, Michael Hall, David Lasby, Steven Ayer, of Imagine Canada and William David Gibbons, Statistics Canada, 2009.

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3 Comments on “Should you subsidize my charity?”

  1. Naumi says:

    I like the argument Dan. I wouldn’t say that I donate because of the tax credit, but I definitely donate more because of the tax credit. As an example, I recently bought my brother-in-law a cheritable gift for Christmas. My budget was $50, but I spent $100 because I figure I’ll get $50 back in taxes.

    I like the idea of a government run Kickstarter to help allocate tax credits, although I could see that being a logistical nightmare. Also, I wonder if it would change much, as the higher net worth individuals that currently donate to causes presumably also pay more taxes and so should get a bigger vote in terms of a crowdfunding system.

    I think corporate matching programs have the right idea where they typically cap matching at a certain amount. So, the government could even it out by capping tax credits at a certain amount (say $1000 per year) and then use the extra money to fund other initiatives (perhaps as voted on by a public polling platform).

    Anyways, interesting thoughts…

  2. Peter Griffiths says:

    Hi Dan,

    Am interested that you’re tackling this subject, seems like you’re getting involved in local charity these days.

    I’m not sure if the Canadian system is the same as the UK’s gift aid system, which on the whole I think is a reasonably fair system for giving tax breaks for charitable donations. Let me briefly explain the UK gift aid system.

    I donate £10 to charity and I can say that I am a UK tax payer earning enough income to pay tax and that I want to gift aid my donation. The effect of this is that the charity can claim from the Tax authorities the basic rate (20%) tax that I will will/have paid when I earned the £10. So in this example the charity would get an extra £2s so a total donation of £12.

    The only benefit to me is that if I’m a higher rate tax payer (circa £40,000 a yr plus) my basic rate tax band gets extended by the amount of the donation (£10) and so I pay 20% on the first £40,010 of income rather than on the first £40,000. I therefore save myself £2 in tax.

    So a £10 donation, has cost me £8 – so given me a 20% tax break has given the charity £12 and effectively meant that the government has missed out on £4 of tax. It would only be £2 were I not a higher rate tax payer.

    I think this gets the incentives about right although it’s arguably unfair that a higher rate tax pay has more incentives to give to charity than a basic rate tax payer.

    Is this different to Canada?

    I’m not sure subsidise is the right word to describe these tax effects in the UK is it? What we’re essentially doing is allowing people to direct the amount that they contribute to public goods away from those provided by the state and into those provided by charitable organisations. Tax payers getting to directly determine how public goods are allocated.

    I think this argument would hold up if you had to pay a certain amount of tax before you can get deductions, so the 20% tax everyone has to pay for the first £40k of income could be seen as the required contribution to an essential basket of public goods, however in the UK we allow this 20% to be passed to the charity so you can get away without giving the state any income tax.

    Irrespective, my issue with the gift aid system is:

    1. Organisations which I don’t believe are providing public goods are permitted to be charities.

    2. There is competition for charitable donations which are subject to the logic of the market and therefore market distortions.

    If we were more stringent about what organisation could or could not be a charity then I’d be happier, we’ve tried this in the UK – charities have to demonstrate what they do for the public interest (some think tanks lost their charitable status) but we’re not going to get the toothpaste back in the tube.

  3. Good topic, and from a slightly different angle I had a post about this 2 years ago at http://socialfinance.ca/blog/post/charitable-deductions-and-direct-democracy focused on whether moving the selection of our public goods from a one person = one vote system (public sector) to a one dollar = one vote system (philanthropic sector) is a wise idea.

    Beyond that, my concerns about this system are at two levels: the distributive and the organizational.

    On the distributive side, which this post (and Peter’s comment – our system is similar to the UKs) mostly touches upon, the indirect subsidization comes out of the general tax coffers that everyone pays into (the relative progressiveness of our tax system has been interpreted in a variety of ways) and gets redistributed towards people not just proportionally based on income, which would be neutral or regressive to begin with, but based on disposable income, which is highly regressive. To add to the regressiveness, the first $200 is deducted at a 15% rate while all above that is deducted at a 29% rate, meaning the more you donate the higher your tax credit per dollar.

    On the organizational level, charitable status severely constrains the activities a socially-oriented organization can take, limiting things like social enterprise activities and access to different types of capital. In complex social-ecological systems it is never clear what the right approach to creative positive social change is until you are operating on the ground… frankly, you never know fully but you can learn as you go along.

    It may be that in providing shelter to a homeless urban population you discover a social enterprise opportunity to provide food that could generate additional revenue through sales that could subsidize your charitable activities or you identify public policy changes that could dramatically ease the burden on the population you’re serving. Either opportunity is made difficult or impossible if your organization is reliant on charitable status. What eliminating the tax subsidies for charitable donations would do is make the cost of donor capital for all three outputs – charitable service provision, social enterprise, advocacy – equal, making it possible for socially-oriented organizations to pivot between different strategies based on their effectiveness in solving problems.


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