The Conversation: Not every tax break is a smart tax break
The following article appeared online on The Conversation on Jan. 14, 2019 from
My smartphone is finally cooling off. It all started three weeks before Black Friday, in late November. Because I make most of my charitable contributions through a website, I need to offer my email address to receive a tax receipt. This has led to a proliferation of retailers and charitable organizations alike seeing me as fair game.
Weeks before Black Friday, I started to receive notices about “Black Friday in October.” Then when December arrived, I experienced increasingly persistent messages that I had only so many days “to make a donation to receive a tax receipt.”
The din continued until Dec. 31 as my phone became almost too hot to handle from the incoming barrage. Then all was quiet.
It’s my fault, of course. I could simply make out a cheque and mail it to the charities of my choice, but online giving is too easy. And getting immediate tax receipts via email allows me to easily corral all of the information to receive my just rewards in the form of a reduced tax bill.
Are charity deductions a bribe?
But as tax season approaches, now is a good time to ask whether it’s sound policy to offer what could be considered a bribe of reduced taxes in exchange for donating to charity. What are the positives and negatives from such a policy? What would be the effect of eliminating these tax benefits?
For every dollar I donate to an eligible charity, I get about 20 to 25 cents in the form of a tax refund. But the dirty little secret is that all taxpayers, including me, must make up these 25 cents through increased taxes.
And so, like all tax benefits, the charitable tax credit raises the overall tax burden.
Whenever government adjusts taxation rules to offer a deduction or credit, economists call this a “tax expenditure” to distinguish it from the direct expenditures authorized by treasury boards.
Just like any public spending, the taxpayer finances these tax expenditures. The more generous the relief granted for charitable donations, the more onerous becomes the tax burden.
Just how much money is involved? Last year the Canadian federal government made $289 billion in tax expenditures, of which $6.1 billion were the tax benefits associated with charitable donations.
This may seem a pittance in the big picture, but we need to delve deeper. Canada incurs much of its tax expenditures by giving up tax rights to provinces; this accounts for about $56 billion. The basic personal exemption accounted for $36 billon and the credits for investing in various registered savings plans cost the Canadian taxpayer $89 billion in lost tax revenues.
Money could have alternate uses
A better basis for comparison among tax expenditures is the GST exemptions on things like child care and tuition, which accounted for $5.7 billion in 2017. Among the direct expenditures, Canada’s public broadcaster, the CBC, has a budget of about $1.2 billion, the Department of Defence consumes $20 billion and the federal government spends $3.5 billion on the RCMP.
In this context, the $6 billion the federal government gives up because we make charitable contributions could have many alternate uses. So what’s the value of stimulating and encouraging charitable donations?
When we donate to charities, we directly support a favoured cause at a discount. And perhaps the incentive of a tax credit may induce more giving. However, here’s the kicker: Recent research suggests that most of us give not for the tax break, but the “warm glow.” And so it may be unnecessary to offer a tax reduction to stimulate charitable donations.
Because we all share in the burden of tax credits, we are unwittingly supporting charities we either do not care about or whose goals we don’t share. Sometimes charities appear to support a cause when masking a completely different goal. I recall the shock at seeing gun manufacturers’ displays at the annual show of Ducks Unlimited.
Tax advantage is highlighted
Many appeals from charities stress the tax advantage to the donor, tainting an altruistic act with selfishness.
The tax credit may also encourage charities and non-profits to become lazy, relying more on the lure of tax credits than showing donors their impact. With few exceptions, non-profits do not routinely subject their investments to independent audits to measure impact or report donation efficiency.
One recent counter-example is the Bill and Melinda Gates Foundation that appears to have spent almost half a billion U.S. dollars to improve teaching effectiveness and failed.
Most of the big guns in Canada’s charity industry issue glossy annual reports replete with anecdotes of how they spend your dollars, but few issue systematic and independent audits to show the net impact of the charity’s investments.
Where do charity dollars actually go?
Donation efficiency — the percentage of donations that translate to direct service — requires work to learn what percentage of total revenues actually flow to end uses.
For example, based on its most recent financial statements, the Canadian Cancer Society directed 53 per cent of its revenue to research and programs, its stated purpose for raising funds in the first place. The remainder went to fundraising, administration and advocacy.
Contrast this to the Canadian Red Cross, where based on its most recent annual report, 90 per cent of revenues flow to programs. One charity I support has a donation efficiency of 85 per cent based on independent financial audits.
Several countries — namely Austria, Finland, Ireland, Italy, Sweden and Switzerland — have removed tax benefits for charitable donations.
It is time for Canada to follow suit. My phone will be thankful.