Higher rate taxpayers personally benefit from this tax relief. Anybody who is a taxpayer can give money to a charity under the Gift Aid scheme. If that is done the charity can reclaim the basic rate tax paid by the taxpayer from HM Revenue & Customs. For a basic rate taxpayer that is the end of the story. For each £1 they give the charity claims back the basic rate tax at 20% - meaning they reclaim 25p (the £ given is net after tax so the pre tax amount presumed to be given is £1 divided by 80% which is £1.25, with 25p being the tax reclaimed). For a higher rate taxpayer this is not the end of the story. If they put the gift on their tax return then they get tax relief for the donation at their full marginal rate of tax. So a 50% rate tax payer who gives £1 to a charity under Gift Aid is still deemed to have paid over £1.25 with the charity reclaiming the 25p in tax but the taxpayer claims relief on the higher rate sum at 50%, meaning that they can claim a refund of 62.5p. The charity has already had 25p so the higher rate tax payer cannot get that back and so instead they benefit by 37.5p (62.5p less 25p). This means that 50p taxpayers actually personally benefit by tax refunds of greater amount than a charity does when they gift money to charity.The first sentence is nonsense. Giving a pound to charity and getting 37.5p back isn't a personal benefit, it's a cost of 62.5p.
When I earned a salary that Murphy would think outrageous, I used a Payroll Giving scheme, by which my employer paid a monthly amount from my gross salary into a charity account in my name, from which I made donations to charity. Income tax was deducted from my salary net of this amount. It's pretty hard to detect where I can be said to have benefited personally from the tax relief. Payroll Giving works differently to the mechanism Murphy describes in that the charity can't claim Gift Aid: I don't think it meaningful to say that I was getting it.
What Murphy means, if he means anything, is that it costs a higher-rate or additional-rate taxpayer less of their net income to give a pound to charity than it costs a basic-rate taxpayer. If you see this as purchasing a sense of inner virtue, something like buying indulgences, then that does reduce the price. On the other hand, a rich person probably needs to make a larger donation to achieve a given level of contentment from it. Similar considerations would apply to the benefit if any of being seen to give the money (Matthew 6:3 has pertinent advice). And few of us think givers to charity deserve to have their motives closely examined.
Murphy's views on tax reliefs generally seem to assume that whatever the prevailing scales of income tax happen to be, those scales applied to one's gross income give a sum which is rightfully the property of the state, and any relief is therefore a gift from the state to the taxpayer. It's far from obvious to me that this is the best way to look at it.
He's also wrong to state that the donor receives a refund. There would only be a refund if the donor had already paid more tax than would be due on application of the tax relief. Otherwise it simply reduces his tax liability.
ReplyDeleteIncome tax is compulsory so part of a taxpayer's income does belong to the State. If you don't believe this point then try resist paying income tax! You won't get far. So Richard Murphy is right in his view that tax relief granted on donations is a gift from the state. The State, if it wished, could legislate to make charitable donations post-tax expenditure as distinct from the current pre-tax expenditure. This is entirely within the gift of the legislature and there is not a Court in the land that could overturn such legislation. Unfortunately for Libertarians, the State does own a part of their incomes - Libertarians are not islands and they must pay for the roads and other services that enable them to earn a living just like other people must.
ReplyDeleteThere is no difference between tax relief and a tax refund. To see this consider a 50% income tax payer who has written a cheque for £80 in favour of their nominated charity. The charity claims £20 under Gift Aid so the charity receives £100 in total. Assuming a self-employed tax payer, a self assessment return will be completed at the year end. Let us say that the tax due before taking account of the charitable donation is £200. The tax payer will need to have paid £200 to HMRC to satisfy this liability.
If the donation is then considered then the tax payer owes HMRC £200 and HMRC owes the tax payer £30. The tax payer can then make a net payment of £170 which is equivalent to the tax payer paying the £200 tax liability and then receiving a tax refund of £30 from HMRC in respect of the charitable donation. This shows the tax relief on the donation and a tax refund are substantively equivalent transactions.
The net effect is that the tax payer has made a net donation of £50 to the charity. The other £50 received by the charity has been paid by the State. The real issue, in my view, is that although income tax purports to be progressive, charitable giving, which is linked to income tax, is not. In the example above, a basic rate tax payer must pay £80 to ensure their nominated charity receives £100 whilst a 50% tax payer only pays £50 to achieve the same outcome.
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