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Unprofitable Attacks on Non-Profits

U.S. President Barack Obama shakes hands as he hosts British Prime Minister David Cameron  and his wife Samantha Cameron for a state dinner at the White House March 14, 2012 in Washington, DC.
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U.S. President Barack Obama shakes hands as he hosts British Prime Minister David Cameron  and his wife Samantha Cameron for a state dinner at the White House March 14, 2012 in Washington, DC.

U.K. Prime Minister David Cameron and President Barack Obama had found themselves united by a common enemy in their recent efforts to boost revenues at a time of austerity. On both sides of the Atlantic, the politicians managed to alienate wealthy individuals and non-profit organizations alike with proposals to clamp down on tax relief on charitable donations.

Their intentions have sparked fierce ripostes and triggered an important wider debate on the practical need for greater scrutiny of charities’ performance and the philosophical mismatch between governments’ and individual donors’ priorities.

In the U.K., the prime minister received sharp criticism when the chancellor of the exchequer, George Osborne, unveiled plans in his March budget to cap tax relief on charitable donations at the higher of 25 per cent of annual income, or £50,000 ($78,450).

In the United States, the Democrats have championed the idea of cutting tax relief on donations from 35 percent to 28 percent, in an effort to help fund Medicare, the health scheme for the elderly, and the president’s proposals to offer universal health insurance coverage.

Some argue the proposed British policy, now abandoned, was largely an unintended consequence of broader populist measures to clamp down on tax avoidance and boost government revenue. It has since been justified by ministers as a way to enhance equity by ensuring that even the richest pay some tax each year; and to prevent donations to fraudulent charities.

The reaction had been vociferous, with many leading charitable groups under the umbrella of the “Give it back, George” campaign warning that the policy would severely harm the non-profit sector.

A study the campaign commissioned estimated that up to £500 million in donations and nearly 19,000 jobs could have been affected if the measures had gone through, as wealthy donors who were able to contribute far beyond the proposed thresholds would have been restricted in their future ability to give.

In the United States, the reaction to Obama’s proposals has been aggressive, too. Pablo Eisenberg, a senior fellow at Georgetown University and a veteran commentator on the non-profit sector, says criticism from the super-rich, with backing from Republicans, has been matched by equally tough opposition from the beneficiaries of their donations.

“Even big, progressive non-profits are only thinking of themselves,” he says. “They don’t give a damn about the public good. We have a non-profit sector that has run wild, with top salaries that have gone through the roof and little serious oversight.”

Many U.S. non-profits, including many leading hospital groups, would not be structured as charitable organizations in the U.K., where provision is largely made through the taxpayer-funded National Health Service.

Beth Breeze, a researcher at the University of Kent, highlights another distinction in the debate on different sides of the Atlantic. “The U.S. has so much philanthropy it almost has the luxury of restricting it. In the U.K., we don’t yet have the situation where we have so much that we can risk losing it.”

Nonetheless, there is a point of similarity. Her research shows that the wealthiest donors in the U.K., like their counterparts in the U.S., give primarily to foundations (where their money is “banked” for future use). Of money directly “spent”, most goes to higher education and international development, followed by arts and culture. Far less supports health and welfare – categories particularly badly hit by austerity measures after the recession.

To critics of the current system, it is unfair that the government is being deprived of taxes that instead go to charities chosen by rich donors, especially when such causes may be significantly different from those prioritized by the state.

Martin Narey, the U.K. government’s adviser on adoption and former head of Barnado’s, the children’s charity that he says rarely received significant contributions from rich donors, argues: “I support tax relief and I’m not saying those giving to the Royal Opera are not generous, but it’s ridiculous to say support should be unlimited when public services need the money just as much.”

However, the argument that elected governments are best placed to identify and prioritize worthy causes is rejected by Chris Flowers, a leading U.S. philanthropist, who stresses the importance of individual choice, flexibility and innovation from donations.

“Reducing relief would reduce my ability to give, and I would rather choose than have some bureaucrat in Washington do so for me,” he says.

While the best charities may be highly effective and entrepreneurial, others suggest not every part of the vast non-profit sector should benefit so easily from automatic tax relief at any level.

Brian Smouha, a former high-profile auditor who created the Coalition for Efficiency to improve charity governance in the U.K., says: “Charities have to provide public benefit. They should describe the quality and the quantity of what they have done. If you don’t measure what you are doing, how can you manage it and find better ways of doing it?”

He cites one organization at which the trustees discussed fundraising extensively but barely examined the services they were responsible for providing. He wants to see an obligation for charities to report regularly on their performance, which could be verified by the Charity Commission or HM Revenue & Customs.

Efforts to reduce tax relief on charitable contributions may be ill structured and the wrong way to attack the current failings of the non-profit sector. But the debate they have sparked on performance and priorities deserves a broader hearing.