Gift Aid tax incentive delivers just 27p extra for every £1 spent

Gift Aid’s aim of encouraging higher-rate taxpayers to make larger charitable donations delivers just 27p more for every additional £1 spent on the tax incentive, and charities would get substantially higher donations if the value of the relief were given directly to them, according to the National Audit Office (NAO) and University of Birmingham tax centre

The newly launched joint tax centre conducted academic research on the value of tax incentives to drive behavioural change, using the NAO’s 2013 value-for-money report on Gift Aid as an example.

The research team looked at 75m self assessment income tax returns for the fiscal years 2004/05 through 2012/13. These covered the period before and after the 2010 tax reforms introducing a higher tax bracket of 50% for incomes above £150,000 and removing the tax-free personal allowance for those earning above £100,000.

These reforms had an unintentionally large impact on the marginal tax rate of those in the £100,000-£112,950 income band, and also further reduced the cost of giving for taxpayers with incomes in these ranges.

Researchers analysed whether gift aid incentives encouraged existing donors to give more, a process called the ‘intensive-margin price elasticity’, as well as whether they resulted in people who have not donated to start doing so (‘extensive-margin price elasticity’).

The combined elasticity for higher-rate taxpayers earning more than £96,163 (ie, those both eligible to claim the rebate on their self-assessment tax return and in the bracket affected by the tax rate changes in 2010) was -0.27.

This means that the amount of giving does respond positively to a change in the cost of giving, but every additional £1 spent on tax incentives is generating only 27p more in donations. Charities would get substantially higher donations if the value of the Gift Aid relief were given directly to them.

Within this overall result, the intensive-margin elasticity was about -0.22 and the extensive-margin elasticity -0.05. The researchers said this showed that, overall, the increase in donations is mostly driven by existing donors giving more. Averaged out, these tax incentives induce only very small numbers of higher-rate taxpayers who have not donated to start donating.

The data also suggested that while donations from taxpayers earning more than £150,000 rose markedly following the reforms, the donations of taxpayers earning between £100,000 and £112,950 were largely unresponsive, despite the fact that this category experienced the sharpest reduction in the price of giving.

The tax centre flagged up one other, unexpected finding, which it says warrants further investigation. Although the tax reforms did not in fact reduce the cost of giving for those earning less than £100,000, the reforms did have an impact on the level of donations.

Researchers found many basic-rate taxpayers had filled in donation amounts on their self-assessment forms even though they did not need to and were not entitled to a rebate. In particular, the lowest income group (those earning less than £8,389) were most likely to start donating when they had not previously, possibly because they erroneously thought they could claim a rebate.

In its report the tax centre, stated: ‘The independent evidence produced so far can now be used to inform the debates about the best way for government to provide public support to donors and charities, and the debate about whether taxpayers understand the benefits to them of existing methods of provisions.’

The centre, which launched in January, says it will now liaise with HMRC’s charities policy team to explore how these results might be used by them and to see whether there is scope for using additional data for further analysis. It is also encouraging others with an interest in tax policy to join its network.

NAO blog gift aid and the tax centre is here.

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