Dear EA community,
I’ve recently joined the EA Brussels group and given my experience in tax, I’ve joined a project aimed at widening the scope of the tax deductibility of charities in Belgium. For the record, in my country we can deduct 45 % of our donations to a set of mostly Belgian charities, and that to a maximum of 10 % of our net income or 250.000 €. It requires that the charity is recognized (not the case for a whole lot of EA top charities), and a minimum of 25 € of donation (per single charity). This is tax deduction, so those with low income will gain no benefit from that given that they are not taxed anyway.
So my question to you all is the following : should the EA community really try to increase tax deductibility for charities given that :
Some research that I read seems to indicate that the price-elasticity of donation is not bigger than 1. This measures indicates by what relative amount the donation increases when the price of donating (that is the tax deduction) decreases. A study by Fack & Landais (2009) (Les incitations fiscales aux dons sont-elles efficaces ?) for example indicates that the price elasticity measured by analyzing the French tax code reform are between −0.2 and −0.6. This would mean that donors don’t increase their donations that much when deductibility increases, but it does impose a cost on the state (for example in France in 2016, the cost of the deductions was 2.2 billion €). It could be that in the end the charities don’t see huge increases in donations, the state is poorer, and the only winners are the donors, who end up with a net benefit. Considering that the donors are generally better of than the rest of the population, it might cause a problem. The science on the subject of price-elasticity of donation seems to be uncertain (some also claiming that the value is bigger then one, see for example Peloza & Steel (2005): The Price Elasticities of Charitable Contributions: A Meta-Analysis).
After reading the book written by Rob Reich (Just Giving: Why Philanthropy Is Failing Democracy and How It Can Do Better), that I recommend to EA reading group by the way, I cannot help but feel that the tax deductibility creates a system of subsidy by the government to the preferences of the donors and that it bypasses the usual process for deciding how to allocate the state budget. My impression, but maybe I’m totally wrong here, is that part of the EA community seems to think that it’s a no-brainer that we should increase deductibility, but in a way this means that we claim, for ourselves, our goals and the ultimate beneficiaries of those goals, some state money. To me it makes it completely different than increasing private donations.
For some countries (US comes to mind), the system seems even more problematic (unless it was reformed since the information I saw dating 2018 : deduction based on the marginal tax rate, huge charity sector able to influence many aspects of society without much control from the public).
On top of that, some remarks I have with the Belgian system that you can maybe transpose to your country :
The Belgian limit of 25 € seems to be unjustified, except maybe due to paperwork cost. With all the automation going on between charities and the government, I cannot see why it could not be taken down.
The fact that tax exempt people get no benefit from the deduction seems to me rather problematic. The least well off are refused a benefit. This could also use a modification.
It seams that a totally different option would be the matching system (see for example Gandullia & Lezzi (2018) : The price elasticity of charitable giving: New experimental evidence). This system is such that the amount given to the charities is matched (in full or in part) by the government. This systems seems much more efficient at increasing amounts collected by charities, and if possible EA groups should try to push that kind of system where possible by lobbying the politicians. This research finds that «on average, donations are significantly higher under the matching subsidy. (…) The difference in total price elasticities (−0.22 for rebate vs −1.14 for matching) and intensive price elasticities (−0.18 for rebate vs −1.12 for matching) between treatments indicates that the form of the subsidy affects the total amount received by the charity, which is much greater under the matching mechanism. Giving under the matching subsidy is three times more responsive in terms of price than is giving under the rebate treatment. Our results are qualitatively and quantitatively similar to the main findings in the literature. Finally, the offer of a subsidy significantly increases donation probability relative to the no-subsidy treatment.»
Before I continue on the project of deductibility, I would like to get a clearer picture on all of this. I’m rather new to EA, so maybe some of you have extensive knowledge on the topic, and in any case this might start a useful discussion. Like many I’ve spoken to, I also feel that there’s something wrong when some random Belgian museum can offer tax deductibility but not the top EA charities, but that should not be the only reason to get tax deductibility. It should be to increase the amount recieved by charities and that’s all, keeping in mind that state money needs to be used with much care and with consideration to the democratic process.
So in summary, is it really that a good idea to increase tax deductibility ?
Great question!
Achieving a direct matching by the gvmt (even if it would be only with, say, a +25% match-factor or so, to keep it roughly in line with what tax-deductability means), instead of tax deductability, could indeed be more just, removing the bias you mention that unnecessarily favors the rich. Spot on imho.
That said, democracies seem to love “tax deductability”: stealing from the state that feels a bit less like stealing. So, deductability can be the single mostly easily acceptable policy. If so, it might pragmatically be worthwhile to support it, despite the negative redistributional consequence just mentioned.
The best action might be to try to set up local EA charities that can easily get certified for tax deductability in Belgium, and use the money either directly to support the intl EA organizations, or, if that is difficult, then in the worst case simply to support similar work in parallel (?).
Mostly independently of 1. vs. 2., whether the (donation elasticity-adjusted) average donation is more effective than gvmt tax collection (or reducing standard gvmt tax burden*), feels difficult to say, and will depend a lot on how much you value different types of social goods. Atm, most donations will not be EA type donations, but one might expect people to give to causes often significantly better than for tax revenues, so I’d personally rather err towards the pro-deduct (or pro-match) side so far.
*It would be wrong to consider only ‘tax revenue lost’ for the gvmt as effect of the tax deductability. In expectation, in a simple model, gvmt will in the medium term partly respond with (i) lower expenditures, and (ii) increase standard tax rates in response to higher tax deductions.
Btw, I personally would not worry about the €25 threshold. Avoiding to register/count too small sums seems a reasonable thing, even if you’re right that it becomes less relevant in the digital world.
Agreeing with others that this is a good question—and it’s not simple. (Because, of course, policy debates should not appear one-sided!)
Two of the key reasons I’m a fan of tax deductibility is because it’s a clear signal about whether something is a charity, and because it’s a behavioral incentive to donate—people feel like they are getting something from donating. (Never mind the fact that they are spending—it’s the same cognitive effect when people feel like they “saved money” by buying something they don’t need on sale.)
On the other hand, I think Rob Reich is right about this, and we’d be better off switching to a system that doesn’t undermine our taxation system generally—though tax deductibility is far from the only culprit, and if this is a single change, the other loopholes are less publicly beneficial as side effects, so I would guess it’s a net negative unless coupled with broader reform. Note that I haven’t read Rob’s latest book, (he is an incredibly fast writer!) and maybe he talks about this. If not, I’d be interested in asking him for his take.
Given all of this, I don’t have a strong take on this—and short of general reform, I’d at least be in favor of expanding tax credits for EA charities, so that they aren’t relatively disadvantaged as places to give.
Personally, I have some small confidence that removing tax deductibility for all charities in all countries would be better than the system we currently have – charity could more easily be more international and people worry less about chasing deductions and more about impact. In countries where tax-deductibility is a small factor I think it’s hard to justify work on expanding it (if most people don’t care). In countries where it’s a big deal then it’s worth setting up charities in those countries or trying to expand the purpose (e.g. animal welfare charities in Australia excludes most things that would help farmed animals).
I prefer matching systems like Gift Aid in the UK over tax-deductibility, but still think that charity might be better off being just treated as any other purchase (probably without goods/services taxes though).
Per my answer, I think it’s likely that eliminating tax deductibility would be net negative without other simplifications of the tax code to eliminate the alternative tax shelters.
Thank you for your replies !
I also thought for a time that removing deductibilities could be good, but to me it all boils down to the price elasticity of donating. When it’s high enough, it does increase the overall amount donated, because people increase their donations. We just have to channel it to the efficient causes rather than remove it imho. It seems to me that we need answer to questions such as :
Are there large crowding out effects (state disinvest because private sector invest) ? My impression is that even though private charities have advantages (innovation, niche focus), there are arguments for a system in which the states increases its budget (reducing deductibility, taxing more) in order to assume part of the missions currently assumed by the private. This would mean more control by citizens over what are the priorities (state budget, democracy), and also more fiscal justice (instead of rewarding the more wealthy with deductions, they would be taxed more for redistribution). Now I for one also think that the state is not the most “effective” of altruists, mostly because its focus is on its resident.
Is the impact achieved through increased donations via deductibility greater than the good that this money can do if it remains in the state budget ? Certainly depends on the countries, priorities, governments, etc. If say all of a sudden the AMF grants deductibility, would you increase your donation ? To me a way forward could be to reach out to the charities that have become deductible in new countries and analyse their data to see the impact on donations, and measure the amount lost in state revenue. The worst case would be a charity with a large amount of donations from citizen of that country being granted deductibility (huge donations : huge spendings for the state) but seeing little increase in donation (few benefit for the cause).
Why is it that so few states use the matching mechanism ? It seems to have advantages over deductibility without much disadvantages, so certainly I’m missing something here.
Thank you all for your input on this topic, I appreciate it !