The return of philanthropy

In the past 20 years, the number of very rich people in Britain has risen sharply and tax incentives for giving are now similar to America's. But Britain does not yet have a US-style culture of giving, and mixing public and private money is not always easy
January 16, 2005

There are more than 160,000 registered charities in Britain. Last year they spent over £20bn on everything from conserving pond life to looking after the homeless. The top 500 fundraising charities raised £4.6bn in voluntary income in 2002-03 and, after a trough in donations during the late 1990s, individual giving is returning to levels last seen in 1995.

Yet private giving in Britain is still disappointingly low - £7.3bn in 2002 (less than 1 per cent of GDP). Charities receive more of their income from government than they do from individual donors. A third of the public gives nothing at all and most of the rest do little more than chuck a few coins into collecting tins. Just 5 per cent of the population make regular gifts of over £50 a month and this generous minority provides over half of total voluntary donations. The rich are more likely to give than the less well off, but their gifts constitute a smaller fraction of their resources: of those households that donate, the wealthiest fifth give less than 1 per cent of their income while the poorest fifth give almost 3 per cent. Yet the greatest potential for a step change in domestic and global philanthropy lies with society's richest members. There are, on one measure, now more millionaires than teachers in Britain, and as the tax reforms of the Thatcher era and rising house prices have transformed the wealth of a large chunk of our population, the prospects for a new era in philanthropy ought to be bright.

Tax incentives to give
Some people are unhappy about public subsidy for philanthropy, especially as the fiscal framework in Britain (and the US) benefits the rich. But tax relief does stimulate spending on public goods rather than on individual consumption. Richer people enjoy bigger tax breaks because the treasury reimburses the full extent of income tax paid on donations, so it costs a higher rate taxpayer just 60p to donate £1, compared to 78p for basic rate taxpayers and £1 for that third of the adult population who do not pay income tax. In any case, the vast majority of donors do not directly experience tax relief. Under Gift Aid, the most popular scheme, relief on donations from basic rate income taxpayers is retrieved by charities and only higher rate taxpayers receive some benefit. (See below for tax relief details.)

Fundraisers say that some rich donors are doing the maths: if they wish to make a total gift of £10,000, they write a cheque for £7,800. After their 18 percentage point rebate (the difference between the basic and higher rates) the cost to them is £6,000 and the charity reclaims the 22 per cent basic rate rebate to create the desired total. This so-called donor-benefit is the primary method of charitable tax relief in the US and, along with the greater simplicity of the US system, is cited as a key factor in the scale of philanthropy among the rich.

In 2003, tax relief on charitable donations cost the British government £1.3bn. Of this sum, £240m was reimbursed to the 11 per cent of taxpayers who pay the higher rate, £293m is accounted for by charities reclaiming the standard rate paid by rich givers, and £350m by relief on charitable legacies, a method of giving available only to those who die with enough assets to pay inheritance tax. That leaves only £350m to support the giving of basic rate taxpayers and non-taxpayers.

Although tax rebates clearly provide some extra incentive to donate, their impact on giving remains unclear: when donors are asked to explain why they give, they describe the pull of the cause before the push of fiscal incentives (see "Why rich people give" below).

The American comparison
Britain has enjoyed a fiscal regime that encourages philanthropy since 1986, but charitable giving in America has attracted tax relief since the 18th century - and last year it cost the US government $17bn in foregone tax.

There remain two big differences in the tax treatment of American donors. First, they are able to claim relief on gifts in kind as well as gifts of cash and assets. Having donated a car, clothes or computer to a charity, American donors can deduct the estimated (and often overvalued) price of that item from their tax bill (congress has just passed legislation to tighten up the perceived abuse of this system).

The second difference lies in "split interest trusts," which enable donors to irrevocably commit a gift to charity on which they receive immediate tax relief and yet retain some financial benefit, usually annual payments from the interest, until they die, when the charity takes possession of the gift. Donors are attracted by the financial security and by the ability to donate illiquid assets such as art or property, which can then create pension-like payments. A number of British charities are campaigning to persuade the chancellor to permit this method of tax-efficient giving. If this lobby succeeds then the incentives for giving in Britain and the US will be more or less indistinguishable, and attention will turn to historical explanations for the different level of enthusiasm for charitable giving.

Victorian Britain invented modern philanthropy, but in the 20th century an important strand of British opinion, mainly on the left, came to see charity as a poor alternative to state-funded provision, Americans have had no such qualms. Since the time of de Tocqueville's early 19th-century celebration of voluntary associations as a cornerstone of US democracy, philanthropy has enjoyed an honoured place in the American story.

Americans' scepticism of bureaucracy and lack of faith in the effectiveness of the state have made charitable donations seem preferable to taxes. American donors commonly note that whereas tax is compulsorily taken, charitable gifts are voluntarily given.

By contrast, the British Social Attitudes survey has shown widespread concern that charitable gifts will somehow result in less public spending on the causes that donors choose to support. Some people saw the establishment of Britain's welfare state as a victory for the state over charity: a 1948 opinion poll found that over 90 per cent of people felt there was no longer a role for charity in Britain. The success of charities in promoting broader social change has challenged that view, but philanthropy is still seen as an optional extra.

Two thirds of Britons make some sort of charitable donation each year, yet this majority activity remains far less visible than in the US. Philanthropy is a British virtue which dare not speak its name, unlike American philanthropy which is a proud element of elite culture. In the US there is intense rivalry, for example, for places on the boards of high-profile charities, such as the Metropolitan Museum of Art in New York. There is also a far greater incidence of "naming" as a public reward for donations; plaques honouring donors are prominent on the walls of US hospitals and universities. Rich people in Britain tend to give in a more understated way.

Furthermore, American philanthropy does not carry the same "poor relief" connotations as British charity. Elite Americans often support charities from which they benefit personally - orchestras, museums, top universities or organisations promoting the interests of their own ethnic or religious group. People reach for their wallets for a variety of reasons but many American donors candidly acknowledge that their philanthropy can help to secure elite status and gain peer-group approval.

Ways of giving also vary markedly between Britain and the US. Most American charitable gifts are planned, while British donors are largely reactive and give when asked. In 1891, the Royal National Lifeboat Institution held the first flag day and similar public collections still account for the largest quantity of gifts. Nearly 60 per cent of individual donations made in 2003 were spontaneous - though the low value of such gifts means that they account for only a fraction of charities' total voluntary income. Shifting donors from spontaneous to planned giving is the holy grail of British fundraising, not least because gifts cannot qualify for tax relief if they come unaccompanied by the taxpayer's details.

The final explanation for the different levels of giving in Britain and the US is people's perception of their wealth. The British grossly underestimate their wealth and therefore do not consider themselves able to make generous gifts to charity. Studies show that only 3.5 per cent of Britons describe themselves as being in the top income quartile, while 47 per cent place themselves in the lowest quartile.

So long as an individual has low "perceptual wealth," he or she is likely to remain unaware of their true ability to give. Furthermore, a much higher proportion of wealth in Britain is held in illiquid assets, largely in the form of property, which is harder to convert into a donation.

Are British attitudes changing?
The task of alerting the British public to their true philanthropic potential is not easy, not least because self-deception in these matters extends to other questions related to giving. It is notoriously hard to extract honest answers from people on an issue as charged as personal generosity, because lies and exaggeration are tempting and difficult to detect.

Even when respondents are honest in describing their giving behaviour, they may not be able to account for the factors that lie behind any particular gift. Philanthropy can be inspired by motives as pure as compassion, as understandable as personal experience of a cause, and as self-interested as the wish to drop down a tax bracket.

There is a strong assumption in the charity sector that fiscal incentives do play a significant role in motivating giving. Objective indicators, such as tracking the rise and fall in donations with varying levels of tax relief, shed little light because it is hard to control for other factors that affect giving, such as the quality of fundraising appeals and changes in interest rates. People have had more income for discretionary spending since personal tax levels fell from their high point in the late 1970s, but charity fundraisers face stiff competition from an innovative luxuries sector.

The truth is that charitable giving languishes near the bottom of Britain's priorities. The Expenditure and Food survey 2002-03 shows that average households find £11.40 a week to spend on alcohol and cigarettes and a further £3.70 on gambling, yet hand over just £1.70 a week to good causes. Even if giving by British citizens doubled, we would still only be making an annual donation of £177 to charity compared with the £9,000 tax bill paid by the average taxpayer. The most optimistic fundraising forecasts inevitably pale in comparison with the capacity of the state to raise and spend funds.

Mixing private charity and state funding
So what does this review tell us about the prospects for a new era of philanthropy? The low profile of British philanthropy may be a consequence of our more positive view of compulsory collective action and acceptance of a large role for the state in funding services. Modest philanthropy may be a price worth paying to resist the extremes of tax resistance and endemic mistrust of government that are apparent in the US. Moreover, in America, philanthropy is in part a positional good: for some donors its value lies in the fact that other people cannot afford to buy their way on to charity boards or get access to tickets for prestigious fundraising events. It may be difficult to detach major philanthropic gestures from such a context of social inequality.

The self-interested element of US philanthropy is reflected in the fact that Harvard University is now the tenth most successful fundraising charity in the US. "Donor payback" is still a much less prominent feature in Britain, where the league tables of charities have long been headed by cancer research, international development and children's causes. However, according to the Charities Aid Foundation, over a tenth of Britain's top 500 fundraising charities are now arts and culture organisations, which together received £341m in voluntary income in 2002-03.

The New Labour government is encouraging British universities to emulate the fundraising success of US universities, and job prospects for fundraisers specialising in universities are good. But British education has a low baseline of voluntary support - total voluntary income donated to all types of educational causes is only 0.3 per cent of state spending - so it is unlikely that private giving will reach significant levels in the near future.

Some on the left fear that a revival of charitable giving will simply provide another route for the rich to influence society. Those who celebrated the transfer of power from private to public hands during the last century fear that a return of philanthropic activity will reverse that achievement. The new charity bill, likely to reach the statute book next year, should help to counter these fears by making it incumbent upon charities to pass a "public benefit" test - high fee-paying organisations such as private schools and hospitals risk losing their charitable status if they cannot demonstrate that they provide sufficient public benefit.

New Labour has invested heavily in the public sector but is also creating new combinations of private and public funding, for example in higher education, which may open the door to more private power in the traditionally public realm. One reason for the passionate resistance in some quarters to the city academy schools, which are mainly state-funded but run by private sponsors (see Andrew Brown in the last issue of Prospect), is an objection to private power over a public asset. However, in other contexts philanthropy and public funding can mix relatively uncontroversially. The NHS benefits from donors who support hospital capital appeals and the volunteers who run hospital shops and transport schemes. Philanthropy will not always be unproblematic but where the prospective benefits are large, the onus must be on progressives to use imaginative policymaking and regulation to ensure that private gifts are able to contribute to the public good.

To avoid some of the unattractive aspects of US philanthropy, we might choose instead to emulate other European countries. In the Netherlands, 82 per cent of the population supports charities and the average annual gift is €205 (£141), almost double Britain's. European charities are often categorised as part of the "social economy," which includes mutuals, co-operatives and other organisations not recognised as charitable in Britain because they exist to benefit their members.

While Britain could do better, we have a Victorian tradition of philanthropy that ought to provide reassurance and inspiration in equal measure. The story of Andrew Carnegie, the Scots-born philanthropist who stated that "he who dies rich, dies disgraced," is said to have inspired the establishment of the Bill and Melinda Gates Foundation, the richest in history, with an endowment of $27bn. Another Scot, the retail entrepreneur Tom Hunter, has recently donated £100m - one fifth of his wealth - to a range of mainly child-related causes. And a recent survey by Lloyds TSB of people with liquid assets of more than £250,000 found that 54 per cent said they would prefer to spend their money or give it to charity than pass it on to their children. By celebrating our history of giving and explaining the difference that philanthropic contributions can make we could inspire the next generation of wealthy Britons, and reclaim our place as world leaders in philanthropy.

A short history of tax incentives for giving in Britain
Britain's first significant "charity budget" was Nigel Lawson's in 1986, which offered tax relief on giving through the payroll—donations were deducted from pay before PAYE was applied, so that, at a basic income tax rate of 29 per cent a £100 donation would cost the donor just £71, saving the tax that would otherwise have been paid on that part of the individual's salary. In 1990, John Major introduced Gift Aid for individuals, complementing the payroll scheme. Under Gift Aid, charities can reclaim the basic rate income tax paid by all donors, whether basic or higher rate taxpayers. So if, at a basic rate of 25 per cent, a donor gave £750 to a charity, the charity would receive £1,000—the original £750 plus the £250 tax reclaimed from the Inland Revenue. In Labour's 2000 budget, Gordon Brown removed the upper and lower thresholds that had previously applied to payroll giving and Gift Aid donations, and announced that government would top up payroll giving donations by 10 per cent for three years (later extended to four; this has just expired). Income tax relief is now available on every cash donation made by a taxpayer.

Ranking of countries by health of non-profit groups
Country score (out of 100)
Netherlands 74
Norway 65
US 61
Sweden 60
UK 58
Belgium 57
Ireland 54
Israel 54
Australia 49
France 49
Finland 47
Germany 46
Argentina 40
Spain 40
Tanzania 39
Austria 37
South Africa 37
Uganda 37
Japan 36
S Korea 35
Italy 33
Kenya 33
Czech Rep 31
Hungary 30
Brazil 29
Colombia 28
Peru 28
Philippines 27
India 26
Poland 25
Mexico 24
Slovakia 24
Romania 22
Pakistan 19

Scores are determined by factors such as charitable contributions, number of volunteers and employees, government support, and the impact of nonprofit groups on society.

Why rich people give
by Theresa Lloyd

In 2004, I published Why Rich People Give, the first detailed analysis of elite philanthropy in Britain. Based on interviews with 100 wealthy individuals, it explores the attitudes of the rich to their wealth.

For those who inherited wealth, there was often a history of family giving to the local community. A sense of community involvement was also expressed by some self-made entrepreneurs with strong local links. Others spoke of a parental or religious influence creating a sense of responsibility for the disadvantaged.

Another factor, important for some Jews and Asians, was that they or their parents had been immigrants to Britain. They talked about wanting to contribute to the society which had given refuge to their family.

People started to give significantly for varied reasons. For some, the combination of having the time and inclination was sufficient. Others needed an outside stimulus - a dynamic individual, a life-changing experience, a family illness - to point the way.

Almost all interviewees reported several reasons for each donation - they wanted to make a difference to a cause in which they believed and also enjoy the stimulation of relationships with other donors, the staff of a charity or the beneficiaries themselves.

The strongest motivator was belief in the cause. Many mentioned the psychological benefits - feeling good about giving time and expertise as well as money. This might also include learning new skills, channelling money which would otherwise go to the state, addressing causes with a personal connection and carving a place in history. Although many boasted big achievements in professional life or creative endeavour, they sought their legacy at least partly in philanthropy. The audience for this was family - "my children will feel proud" - and peers; few were interested in the approval of wider society.

Most wanted some appreciation or recognition for their support from the recipient organisation, but sometimes donors took active steps to avoid publicity or recognition.

There was a range of views about the proper extent of the role of the state, but virtually universal agreement that the state should pay for "basics" including health and education, and that private philanthropy should not substitute for state funding. But charities were often seen as pioneering - creating models of best practice to be emulated elsewhere.

The question of how much money to leave to children was also a big concern. Some interviewees were reviewing their approach in the light of changing attitudes to inheritance and the perceived danger of inheriting too much. Many were seeking a balance between leaving an appropriate amount to their children and to other, mainly charitable, purposes.

Interviewees had very different attitudes to financial security. Around three quarters said they felt reasonably secure. Some were clear that their insecurities about money had complicated and personal roots.

There was a lot of unhappiness about the status of British philanthropy. For many, this was linked to the complex attitudes of the British to money, class and wealth creation. The absence of an expectation that people who can afford to give should give, plus a lack of role models, led to a desire to give discreetly and discouraged an open culture of giving.

"Having more money" was rated as the factor most likely to increase the individual's level of giving. Finding a new cause to care about passionately was the next most important, cited by over half those who responded. Only a third mentioned better tax incentives. So helping people to discern their true level of wealth, and to understand how much they need for all eventualities - and thus the amount they have left for causes about which they care - could be a key role for advisers to the wealthy. Ideally, this would be coupled with a greater celebration of philanthropy by society in general.

Theresa Lloyd is author of "Why Rich People Give" (Association of Charitable Foundations)