This is a write-up of an excellent plenary session from our Villa d’Este conference in November.

In the last year, philanthropy has been much in the news. The pandemic, as well as other world disasters, has focused attention on the many faults in our systems and huge inequalities that exist. They have also created a new and refreshed sense of solidarity, empathy and philanthropic generosity.

Who should have the power to funnel this generosity? In this session, through debate, we will examine the tension between government programmes to help the disadvantaged (funded by taxpayers) and private philanthropy for which tax deductions are permitted. Are the political agendas of governments and individuals reconcilable? How can families intervene to help the world through philanthropy? 

Pro-Tax Relief for Philanthropy:

Over the last 15 years, the philanthropy ecosystem has grown, evolved, and become more international, especially in Europe with the ECJ jurisprudence on free movement of philanthropic capital as well as the principle of non-discrimination on the grounds of nationality. It is arguable therefore that philanthropy should have no “national boundaries” and national tax should not be a way to restrict philanthropy.

The second argument was that Philanthropists, operating often through their charitable trusts or foundations, form an integral part of the infrastructure of civil society. They are agents of positive social and environmental change and innovations as long as they are truly organized for the pursuit of public-benefit objectives. On that basis, States have generally recognized the need to support philanthropy. This is why tax incentives are given in most EU countries to public benefit organizations (tax exemptions) and donors (tax relief or tax credit), be it individuals or corporations. This is nowadays the norm. It suggests that the EU states themselves consider tax incentives as an effective way to encourage and support private philanthropy

By way of background in Europe, it is interesting to note that it is after WW2 that some European countries saw the emergence of private philanthropy structured through trusts and foundations. This is because it was perceived as an important factor of reconstruction and support for the public-benefit action. But it is really after the fall of the Iron Curtain in 1989 that one saw new foundation laws in Europe focusing on the pursuit of public benefit purposes only. The COVID-19 pandemic has seen a resurgence in private donations around the world to address the long-lasting social and environmental impact of the crisis. It is therefore not the time to discourage donors in their charitable giving by eliminating well established tax benefits applicable to charitable activities;

Finally, the fact that philanthropists benefit from tax relief is the result of democratically elected governments and parliaments voting in favour of those tax benefits. They design the legal, tax and regulatory framework within which the philanthropy echo-system operates. This leads to clear purposes that foundations are allowed to follow and increased governance, transparency and accountability requirements. Governments can constrict or enable their activities.

Why might solely relying on the government not be the best path?

Governments are arguably not as efficient as a growing number of mid-size to larger charitable foundations which are institutionalizing and professionalizing the running of their charitable giving activities.

The shortermism of politicians in democratic states, as they constantly look to their next election cycle, is not necessarily conducive for ‘good behaviour’ and policies. Only private philanthropy can take long-term views on societal and environmental issues in a non-political (and therefore potentially less bias) way. 

We are also seeing an attack on democracy like never before. Even in traditional democracies like France and the UK we are seeing a rise of nationalists, populists, xenophobes and conservatism on the rise. This may result in politically oriented programs that can discriminate a large part of the population or refrain to invest in environmental programs incompatible with their voters’ dogmas or ideologies.

Do families and private philanthropic organisations therefore need to step up and fill this void for the benefit of civil society?

Anti-Tax Relief for Philanthropy:

It was acknowledged that, in a free society, citizens should be able to spend their money on charity with few restrictions. However, the matter that was questioned was whether it is fair to incentivise individuals to give money to charity when those finances rightfully belong to the state. Likewise, is it right that these individuals should have the power and autonomy to direct funds towards charities and projects which may not be in civil interest just because they have the funds?

In order to answer this question it was argued that we need to step back from small individual gifts and transactions, and look to the ‘macro’; the process whereby state funds are diverted from state designed programmes to individual or corporate initiatives.

It was argued that it is potentially undemocratic to use the state’s money out of the control of the state, as the electorate would have no control or influence over how it would be spent. A government can be voted out of power, while a charitable donor cannot. Thus, this tax revenue is given to a small handful of wealthy donors and large corporations when it should be in state control. 

Charitable Foundations appear to be efficient and more effective than governments because they are able to choose their goals: this is not a luxury governments have. While they may target the symptoms of poverty, they do not have the power to deal with the root of poverty. That responsibility remains with the government. 

Indeed, the definition of ‘charity’ is very broad (especially in the UK), and can result in organisations such as elite educational institutions receiving the benefit of tax relief while other institutions, having a greater need, will not. A donation to a private school to enhance their facilities is considered a public benefit and receives tax relief which diverts funds from schools which have do not even have the facilities. This creates greater inequality and a greater sense of inequality.

Tax relief also disproportionately benefits those who pay more tax in the UK. Someone who would pay a lower tax rate cannot receive any tax relief on gifts made – instead, that tax relief is paid directly to the charity. Thus, if a higher rate tax payer were to make the same value donation, it would cost them less with a disproportionate advantage for those with higher earnings. 

It was finally argued that tax relief does not actually encourage philanthropy. In the UK, lower rate taxpayers pay money into charities even without the benefit of tax relief.

This argument concluded with a question: which is better?

  • a democratically elected government pursuing a coordinated program to create a better society?
  • an individual or corporate using tax revenues to pursue its own vision of a better society? 
  • charities competing with each other for funds to pursue programmes which are uncoordinated and overlap with other charities?

It was concluded that the pro-tax relief argument was more favourable, but that a system of checks and balances need to be in place and constantly refined in order to avoid issues or conflicts.