Tracy Smith-Carrier says no
Associate professor of humanitarian studies and business at Royal Roads University
Charitable tax deductions largely benefit wealthy people and businesses. These days fewer Canadians are making small charitable donations, with older and wealthier donors offsetting this. The top individual donors in Canada have incomes over $150,000. They need the financial boost offered by tax breaks not nearly as much as people who don’t have money to give in the first place. This is especially true of ultra-rich corporations, whose charitable giving may ultimately be intended to reduce their tax liabilities or for marketing that portrays an image of social responsibility. A US survey found employees would rather that corporate philanthropic funds be used to improve wages and working conditions instead.
Giving tax breaks to wealthy people and corporations reduces money that should rightfully go to public coffers. Canadians could benefit from the monies forgone on tax deductions—these could instead support effective policy, such as a basic income or investments in affordable housing.
The science behind what motivates people to give to charity raises further questions. Empirical literature shows that monetary rewards can, in fact, have perverse effects on people’s motivation to donate. A tax break can signal that the action needs to be incentivized. Consequently, “pro-social” behaviours decrease in the presence of financial rewards. The incentives reduce intrinsic motivation—the notion that people do things “that aren’t means to some further end but an end in itself.”
Richard Titmuss, who left an indelible mark on modern social welfare, observed this relationship in 1970. Claudia Niza and colleagues’ 2013 systematic review of the research confirmed Titmuss’s hypothesis, showing that paying blood donors doesn’t increase blood supply. Research on volunteerism shows the same trend: financial compensation significantly reduces volunteer hours. The conclusion: positive rewards have negative effects on intrinsic motivation. In simpler terms, tax breaks provide incentives for people not to give. Motivation to give comes more from the heart, not the pocketbook.
Furthermore, incentivizing charitable donations privileges the charity sector and makes it appear that charity is, and should be, the solution to social problems such as poverty, hunger and homelessness. Certainly, charities contribute to the well-being of society. Yet governments have increasingly looked to this sector to address issues that should be remedied through policy, not charity. Relying on charity exonerates the state from its obligations to ensure citizens’ rights to food, housing and an adequate standard of living. Meanwhile the charitable model, given its inherent unpredictability, has been criticized for tackling symptoms, not root causes, of social problems.
Let’s do away with venerating charity by wealthy donors and corporations, and use the funds from tax deductions to support policies that remedy the problems that charities (while well-intentioned) cannot adequately address.
Justin Smith Says Yes
Associate professor and associate chair of economics at Wilfrid Laurier University
Canada’s tax system has supported charitable donations since the 1930s. Today, federal and provincial governments subsidize giving through generous tax credits. Depending on where you live and how much you give, the combined federal/provincial credit for an additional $1 donation can reach as high as 58.75 cents. In the most recent General Social Survey (2018), half of donors said they would claim credit for donations in the prior year. The forgone federal tax revenue (or “tax expenditure”) arising from such donations amounts to $3.4-billion; this doesn’t count provincial or municipal tax expenditures or those related to corporations.
Given Canada’s generous support for donations through the tax system, it’s natural to ask whether this is a good idea. There is a strong economic case for government intervention in the market: without tax credits, fewer donations would be made. Economists consider charity a “public good”—it can be enjoyed by everyone whether or not they contribute to it. For example, a donation to a hospital that saves someone’s life can be enjoyed by the donor, the person saved, their family and so on. A well-known result in economic theory is that when public goods are financed entirely through voluntary contributions, people “free-ride” on the contributions of others and too little of the good is provided. In the case of charity, if I know that someone else is donating to the food bank, I may feel that those in need are supported and decline to contribute myself. To reach a more optimal level of charity, government can intervene. Canada does this by funding charities directly and by offering tax incentives to individuals and corporations. While it would be simpler if government provided all the funding directly, instead of operating indirectly through the tax system, economic theory and research shows that government contributions are subject to “crowding out,” where private donors pull back their donations when governments contribute.
Recent evidence from Canada by Hickey, Minaker, Payne, Roberts and Smith (2023) that uses tax records going back roughly 15 years shows that, on average, donation tax credits are “treasury efficient”: people respond to them by giving more to charity than the amount of the credit. This happens both because the credits incentivize non-givers to start giving and givers to give more. Looking deeper, tax filers at the bottom of the income distribution respond the most—about three to four times more than people at the very top of the distribution. A larger body of evidence from around the globe—where the exact tax incentives vary—supports the idea that individuals respond to higher subsidies on giving by donating more.
Charities provide essential goods and services that are not always offered in the market. What the economic theory and evidence shows is that governments have good reason to intervene, and that tax incentives are an effective way to increase donations.
Tracy Smith-Carrier responds to Justin Smith
Justin Smith poses an important question: “Is it a good idea to support donations through the tax system?” Canada indeed has a long history of incentivizing charitable giving, yet is this necessarily the right course of action? Such giving in Canada has been declining for 20 years, and, according to the Ontario Non-Profit Network, has reached an historic low due to the affordability crisis. “Giving Tuesday” (November 28) last year was awash with emails and ads imploring people to donate.
In Budget 2023 the Government of Canada claimed that “through the significant use of deductions, credits and other tax preferences, some of the wealthiest Canadians pay little to no personal income tax.” It therefore proposed changes to the alternative minimum tax (AMT) to provide fewer tax breaks to the wealthy. Some people in the non-profit sector argued that the changes would reduce the incentive for wealthy people to give, adversely impacting charitable operations and activities. The charity Imagine Canada argued that the changes could “disincentivize the only category of donors whose contributions reliably fill the gaps left by those who are no longer able to give.” And so, when the government initiated its 2023 budget bill (C-59), the AMT wasn’t in it. The notion that incentives are needed to get people to dig deeper into their pockets to give suggests more is at play than mere altruism. People begin to donate to charity as much to lower their tax bill (while seeming benevolent) as to contribute to an important cause.
Smith points to the “generous” tax incentives provided to individuals and corporations for charitable giving, as well as to research showing that tax filers at the bottom of the income distribution respond the most, at “about three to four times more than people at the very top.” While tax credits may be “treasury efficient,” as Smith argues, they aren’t “pocketbook efficient” if they’re being collected from the very people who could benefit most from keeping the money they otherwise donate. It’s also regrettable that their funds (tiny relative to the donations of corporations and wealthy individuals) are being used to prop up the charitable system, which, while well-intentioned, stigmatizes the people who access its services.
Democratic leaders should craft policies on everyone’s behalf. These decisions shouldn’t be left to charities.
The charity system is marked by power and privilege. Status, prestige and money are conferred to the giver, while the receiver is subjected to humiliation, denigration and shame. Frequently people who receive charity must acquiesce to the (often paternalistic) expectations imposed on them to demonstrate preferred behaviours or actions—such as taking parenting classes—to receive services. Such an approach is counter to social justice principles to ensure adequate and dignified means of support.
Democratic governments are expected to craft policies to address societal problems on everyone’s behalf. These decisions shouldn’t be left to charities, which don’t hold the legitimacy of decision-making afforded at the ballot-box, or the human rights duties entrusted to the state. Charity (or the delivery of “privately provided public goods,” as Smith calls it), acts as a “moral safety valve,” in the words of professor Janet Poppendieck, letting state actors off the hook for ignoring problems that should be remedied through policy and law. Our system is deeply flawed, and as we haven’t addressed the root causes of social problems through our policy choices, charity has tried to fill the gaps. Yet the charitable system is characterized by unpredictability (uncertain financial contributions), variability (different volumes at different times), unreliability (no guarantees that activities or projects will be realized or completed), inefficiency (“trendy” causes create duplicate services, while other causes receive scant attention), and ineffectiveness (Valerie Tarasuk’s research shows, for example, that people experiencing profound food insecurity often avoid food banks). It would be simpler, more dignified and effective to provide assistance directly to individuals in need.
Economist David Macdonald’s research shows how, out of the 64 tax expenditures—a.k.a. loopholes—on Canada’s books in 2016, only five can be considered progressive (assisting low-income earners). The charitable donation tax credit is but one. If we eliminate these loopholes altogether, Macdonald estimates we could double the money collected through personal income taxes. We’d curb corporate greed further if we increased corporate taxes (whittled down from 43 per cent in 1997 to the present 15 per cent) and introduced measures to recover revenues lost to tax havens. With a robust national treasury, we could have real conversations about a basic income, affordable housing, reducing post-secondary tuition and bolstering our overwhelmed healthcare system.
I don’t disagree that “generous tax deductions” can incentivize people to give to charity. I do take issue with the assumption that this works in our collective best interest.
Justin smith responds to tracy smith-carrier
One of Tracy Smith-Carrier’s core arguments is that subsidizing charitable donors through the tax system disproportionately benefits the rich, which is inequitable. It’s true that the credit mostly accrues to people at the high end of the income distribution, and I’m sympathetic to the idea that we shouldn’t direct too many public dollars to initiatives where the benefits flow primarily to the rich. In the case of charitable contributions, however, I think it is justified for a few reasons. First, the tax credit per dollar donated for individual donations in Canada is set up to be (mostly) neutral with respect to income, so at least at the level of individual donations the benefits do not actually favour the rich, with a few exceptions. This is unlike in other countries, such as the US, where donations are deducted from income, and as a result people with higher marginal tax rates get a larger deduction on a dollar donated in addition to getting a larger share of the tax benefit.
Given Canada’s tax system, most of the benefits flow to the wealthy only because they donate more. Tax data from 2001 to 2015 show that the inflation-adjusted average donation for people in the bottom 20 per cent of the income distribution was $0, whereas in the top 20 per cent it was $2,900, and in the top 1 per cent it was almost $19,000. From a purely logistical point of view, if we want to incentivize charitable donations at all, it is difficult to do so without those benefits accruing to the rich, simply because they are the ones who donate the most to charity.
Despite the credits mostly flowing to the rich, as I noted in my original argument in favour of tax credits for donations, the data suggest that the tax credit is treasury-efficient across the income distribution, which means people pass on their tax credit to charities. So while the rich are getting big tax breaks on average, it is not that they keep it all for themselves.
While the wealthy indeed receive more in tax benefits, it is important to remember who consumes most of the goods provided by the charitable sector. When it comes to charities that operate in areas such as food, shelter and healthcare, much of what they produce is consumed primarily by Canadians at the bottom of the income distribution.
While the wealthy receive tax benefits, people on low incomes consume most of the goods charities provide.
All of this is to say that looking at the tax credit in isolation makes it appear as though the rich receive significant benefits. Looking more deeply, however, those benefits are largely passed on to charities and appear to achieve the goal of increasing the amount of charity without undoing some of the progressivity of the tax system.
Another key point in professor Smith-Carrier’s initial argument was that we shouldn’t rely on charities to provide goods and services that the government could or should provide. As I argued initially, economists think there is a free-rider problem inherent in the charitable sector, and the government can get involved to help provide more of this public good. In the case of charities, I don’t believe it is the best approach for them to directly provide those goods, for a couple of reasons. As I noted in my original argument, direct government provision of charitable goods might lead to crowding out. If we were to try to increase the number of food banks in Alberta, for example, we might see that existing food banks would get fewer donations.
Furthermore, the charitable sector is large and complex, and it would be difficult for the government to decide what to provide and where. By giving funds to individuals, we can let the market allocate those dollars to the charities that need the most support and that donors favour the most.
Another consideration is the fact that relying on direct government provision can make charitable goods subject to the political cycle, which can lead to inconsistent provision depending on which political party is in power at the time.
Lastly, Smith-Carrier notes that the literature on giving suggests that financial rewards reduce the incentive to give. I would dispute that claim on the basis of an extensive literature in economics—which includes the analysis of surveys, administrative data, field experiments and randomized control trials—that examines the effect of reducing the “price” of a donation by offering a deduction, a credit or a matching donation, and it overwhelmingly suggests that a lower price increases donations, and that the larger the financial incentive, the larger the increase in donations.
Incentivizing people to give is complicated, and Smith-Carrier points out some important issues with doing this through the tax system. My view is that Canada’s system works well and that the tax credits are an important part of increasing donations.
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