Osborne should reverse inheritance tax cut not the capping of tax relief on charitable donations

In last year’s budget, George Osborne offered a cut in inheritance tax if people donated to charitable causes, a move aimed at stimulating the floundering idea of the Big Society; the move meant if you qualify to pay inheritance tax but you give 10% of your estate to charity, the rate of that tax is reduced from 40% to 36%.

Fast-forward a year to Osborne’s 2012 budget, in which it was announced that tax relief on charitable donations will be capped at 25% of one’s income or £50,000, whichever is higher.  How are the two policies consistent? One encourages charitable donations with the promise of a reduced inheritance tax bill whilst the other is specifically aimed at warning individuals that such donations should not allow them to avoid paying tax. In keeping with most of the government’s fiscal measures, it’s a mess.

If you are in favour of one of the two policies then logically you should be opposed to the other: in favour of encouraging charitable donations? Then don’t limit tax relief on them; Opposed to people reducing their tax bill through donations? Then don’t offer relief on inheritance tax. One of these two policies should be reversed. The question is which one?

I don’t want to dissuade people from making donations to charity. However, such donations should not be a substitute for making a contribution to society through paying taxes. This government have somehow allowed themselves to be dragged into a debate where it is seemingly one of the other. You either pay tax or you donate to charity, but heaven forbid anyone might actually want to do both. The rich are protesting, claiming that if tax relief on their donations is actually capped, they will think twice before making future donations. They’re posturing, just like they did over the top rate of income tax, and yet just like they did over that battle, the government looks set to cave to the demands of the rich, as the decision to cap tax relief is now under review.

Undoubtedly there are some people out there who donate to charity just to reduce their tax bill but the vast majority give to charities because there are worthy causes out there. After all, everyone who pays income tax can claim some form of relief when they donate to charities. Think back to the last time you donated; was your motivation providing funds to a cause that you believe in, or was it simply the satisfaction of reducing the amount of tax you gave to the state? Me thinks it was probably more likely to have been the former.

But what of those people who really do view the situation as a trade-off between donating to charity or paying tax to the state? Their argument is essentially that by making charitable donations they are still making an important contribution to society and what’s more they can decide better than the state where that money really needs to go. There is some truth in this argument; in 2012, UK government will spend £47.2 billion on defence. Personally, I can think of quite a few better ways to spend that money. You might disagree with that, but rack your brains and I’m sure it won’t take you long to think of an area of public spending that you think is receiving a grossly unfair amount.

Of course, the problem with this argument is that the alternative would be a whole lot worse. The idea that if the state steps aside and lets the market trample all across society then charities would able to adequately fill the void is fanciful. To take but one example, suppose a reasonably well-off ex-public school pupil decides that they don’t wish to pay any income tax and therefore makes a large enough donation to their former school to wipe out their tax bill. The school is a charity, and that person has decided they’ve have made an efficient contribution to society by donating to it. If that money had gone instead to the state would’ve it have been spent in the most efficient and equitable manner? Of course not, but almost certainly the proportion of it that went towards providing education would have been spread more equitably than if it had gone straight into the pockets of a private school.

The state exists to provide public services and a welfare state that is fair and equitable to all – it needs taxpayer’s money to do that. Of course it often falls well short of these lofty ideals but it is capable of getting a damn site closer than if it is left to a combination of the market and charitable giving alone. If George Osborne can’t recognise that then perhaps he should have a little look at how Britain fared back in the 19th century when it was left almost solely to charities to try and deal with all our social ills.

There will always be a role for charities alongside the state and most individuals don’t need a financial incentive to recognise that. If George Osborne wants to reverse one of his budget proposals it should be the decision to offer tax relief on inheritance; capping tax relief on charity donations is the right move.

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Posted on April 17, 2012, in Coalition Government, Comment, Conservative Party and tagged , , , , , , , . Bookmark the permalink. 2 Comments.

  1. As usual, so fascinating and also practical blog post Osborne should reverse inheritance tax cut not the capping of tax relief on charitable donations Politics Matters.
    .. Cheers…

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    Particularly great information Osborne should reverse inheritance tax cut not the capping of tax relief on charitable donations Politics Matters.. Always keep publishing

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